Fed To Dump Its Balance Sheet Onto Unsuspecting Public
On the heels of the Fed decision, today 40-year veteran, put together another extraordinary piece. discussed what the Fed and central planners are facing and how the Fed will buy time and dump its balance sheet onto an unsuspecting public.
“It is popular to claim that there is no exit strategy for the U.S. Federal Reserve and Chairman Bernanke. But in reality it is always a long shot to assume that the Fed is out of options.
We agree with those who suggest a reaffirmation of the criteria for triggering “tapering” to begin. The criteria will tie the action and the magnitude of the tapering to employment, general economic conditions, interest rates and inflation. That said, we would not be surprised to see another announcement about a perfectly plausible path to an exit for the Fed.
“Since the 2008 meltdown, the Fed purchased many financial instruments including mortgage-backed securities to arrive at the current $4 trillion balance sheet. It seems to us that the cornerstone of an exit strategy would be to securitize the mortgage-backed securities, and sell those back into the retirement and endowment funds.
A recent estimate of the total retirement assets just in the U.S. tallied close to $17 trillion. Packaging up those securities and distributing back into the system would go a long way toward a major reduction in the Fed’s balance sheet and make room for the continuing monetization of the budgets deficits which are sure to accelerate as the onslaught of unfunded liabilities hits the public and private sectors.
Rising interest rates would impact the value of those securities, but the Fed could easily make it so that buyers could value them at par for reporting purposes. Given the mortgage rates are only likely to continue higher, the likelihood of significant refinancing affecting the pools of mortgages is very low.
