The Institutional Risk Analyst

As Chairman Powell said in the latest FOMC presser, the SOMA reinvestment plan is intended to get their duration down to that of the Treasury debt outstanding by allowing long duration MBS to be replaced by short-duration T-bills. Could the Fed have continued to shrink the SOMA further as Bowman and others have urged? 

The leading candidate to be the next Fed Chairman believes the balance sheet could safely shrink to around $5.8 trillion, with bank reserves potentially decreasing to $2.7 trillion. Waller argues that a shift towards more short-term Treasury bills would make the balance sheet safer and more flexible, and he is absolutely right.

Banks continue to show a strong preference for late vintage loans over securities, a fact which may cause loan yields to continue falling

It’s time for the Fed to get smart on duration risk before circumstances create another money market crisis. 

As the public debt of the US grows, after all, the implicit claim of the Treasury on all private US assets also grows.