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The Institutional Risk Analyst

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Questions for Chairman Powell

Updated: Jul 24, 2022

July 25, 2022 | Premium Service | As the meeting of the Federal Open Market Approaches this week and, more important, Camp Kotok begins next week, we have more than a few questions for Chairman Jerome Powell and his colleagues. A careful reading of the Fed’s research provides some insights about future Fed policy. Since the May 2022 statement regarding the management of the system open market account or SOMA, there have been a couple of important pieces of research that are suggestive regarding future policy. H/T to Bill Nelson at Bank Policy Institute.

Two research reports by the Fed of New York have illuminated both the history of the Fed’s SOMA portfolio and then project forward the likely losses by the Fed as the portfolio gradually shrinks. More, the second paper by Alyssa Anderson, Philippa Marks, Dave Na, Bernd Schlusche, and Zeynep Senyuz, sets some disturbing markers for the future size of the SOMA portfolio and the realized and unrealized losses that are likely to accumulate.

Totto Ramen East (2019)

In the second FEDS Notes paper, the authors explain how the Fed is likely to start to generate actual, realized losses because of the interest rate mismatch on the Fed portfolio. This is more than a little amusing and also terrible to behold. The FRBNY paper essentially highlights one of the biggest downside risks created by quantitative easing or “QE,” namely a gigantic interest rate mismatch across the market for banks, non-banks and other financial intermediaries including the GSEs. Thus in the final paragraph, the Fed drops a bomb:

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