June 26, 2023 | Premium Service | Developing a forward investment thesis for the world of housing credit requires first that we recognize the impact of monetary policy on both asset returns and the apparent cost of credit. Asset returns were boosted by low interest rates, while soaring asset valuations muted or even turned negative the apparent cost of credit.
In January 2022, the Congressional Research Service published a handy history of the Fed’s monetary machinations, “Federal Reseve: Tapering of Asset Purchases,” focusing on the resumption of Fed asset purchases in 2019:
“In the fall of 2019, a liquidity shortage caused repo market turmoil, prompting the Fed to begin purchasing Treasuries again. Asset purchases rapidly increased in response to financial unrest caused by the pandemic’s onset in the spring of 2020, with securities holdings increasing by about $2 trillion in two months. MBS purchases resumed then, and for the first time the Fed purchased agency CMBS (MBS backed by commercial mortgages) in relatively small amounts. Beginning in June 2020, the Fed purchased $120 billion of securities per month—a faster rate than the rounds of QE following the financial crisis. In December 2020, it pledged to continue purchases at this rate “until substantial further progress has been made toward its maximum employment and price stability goals.” When tapering was first announced, the unemployment rate had fallen from 6.7% to 4.8% and the Fed’s targeted inflation measure had risen from 1.3% to 4.3%. Since March 2020, the Fed’s securities holdings have doubled to $8.9 trillion.”
The immediate impact of the asset purchases was to push down interest rates across the board, the obvious impact of the FOMC removing almost $9 trillion in securities from the Treasury and mortgage markets. Our discussion of the FOMC meeting last week with Bloomberg Television is below.