The FOMC reveals absolute hawkishness
- The Fed raised Fed funds rates by 75 bps, bringing them to a range of 3.0%-3.25% (from 2.25%-2.50% previously).
- Roll over of principal payments (previous QE) of Treasury securities that exceed a cap of 60 bn USD per month (previously reinvestments that exceeded 30 bn USD) -> significant reaction. The Fed will reinvest significantly less -> hawkish.
- Reinvestment of principal payment of MBS that exceeds a cap of 35 bn USD (before 17.5 bn USD) per month. Significant reaction-> double up-> Fed will reinvest significantly less than previously-> hawkish
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In other words, Treasury securities and MBS will move “more freely,” and even reinvestments from the Fed will be much smaller. As a result, the Fed’s balance sheet will shrink over time with a slight path but faster than we saw in the previous months. It also means that mortgage rates and treasury securities can rise faster. However, we believe that in such pricing, it is doubtful. The Fed’s balance sheet:
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