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Fed watch • Credit creation, cause & effect • August 3, 2022
(1) The Federal Reserve buys and sells securities and (2) sets interest rates to influence: (3) borrowing costs, (4) lending activity, (5) inflation and employment; (6) with varying effects.

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Latest data: August 3, 2022

TLDR: Last week, the Fed trimmed $5.8bn net from its Treasury security holdings and $10.7bn net from its mortgage-backed security holdings. The total amount of Reserve Bank credit shrank by $18.3bn net.
  • The 10-year Treasury yield fell by 5bp to 2.73%
  • The 30-year fixed-rate mortgage fell by 31bp to 4.99%
  • The market expects the federal funds rate to hit 325-350bp by year-end
  • The median price of new houses sold in America has dropped 12% in the past two months. In April, the median new house cost $457,000, but in June, it was $402,000. This drop is likely a harbinger for house prices falling more broadly.

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  1. The Federal Reserve buys and sells securities


  1. And sets interest rates


  1. To influence: borrowing costs



  1. Lending activity


  1. Inflation & employment


  1. With varying effects


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Why is this gobbledygook relevant?

The Federal Reserve creates money and uses it to buy bonds. They do this to push interest rates down and to put more money into the economy. Low rates mean people can borrow more, spend more, and afford higher prices. More spending and higher prices mean people feel rich, and businesses hire new employees.

But, if prices rise too quickly or people borrow too much, the Fed does the opposite. It sells the bonds it has and then destroys the money it receives. These sales push interest rates up and take money out of the economy. Higher rates mean people can't borrow or spend as much and must pay lower prices. It makes people feel poorer than before, stops them from being able to spend as much, and makes businesses trim employment.

In addition to this, the Fed borrows and lends to banks. If a bank doesn't have enough money for a day or two, it can borrow from the Fed. If it has too much, it can lend to the Fed. A group of people who work for the Fed, the Federal Open Market Committee (FOMC), decide the interest rate that the Fed will pay for, or demand of, these short-term loans.

The Fed does these because they believe in two objectives: first, a low and stable inflation rate is good for the economy, and second, that minimising unemployment is desirable.

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FAQs

Why is the Fed's MBS position still going up?
It takes mortgage-backed securities up to 180 days to settle. Increases in the MBS position are most likely old purchases settling. The Fed is letting $17bn of mortgages amortise off the balance sheet per month. The MBS position will shrink, but on a week-to-week basis, it will fluctuate.

W**hy do you look at weekly average balance sheet data instead of the Wednesday level?**
It takes time for asset settlement to occur. The holdings on any given day will fluctuate wildly—especially given that the Fed owns almost $9trn of assets. The weekly average is smoother and more indicative of the monetary policy trend.

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Sources:

Notes:
  • I will update this data weekly (usually Friday morning GMT).
  • Let me know in the comments if there is anything you would like changed or added.
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