Once the economy stabilized and the crisis had passed, the goal was to remove the extraordinary measures used to combat the crisis, to drain the liquidity that had been added, and to return to a more normal policy. These measures were always intended to be temporary. The Treasury Notes and Bonds, combined with the Agency MBS, dramatically increased the interest rate exposure of the Fed’s SOMA portfolio. These holdings significantly extended the average duration of their portfolio. They were attempting to improve the liquidity of banks by removing these illiquid securities, which were partially responsible for the onset of the GFC, from bank balance sheets.Īdditionally, the Fed also deviated from their policy of mostly buying short-term US Treasury securities by purchasing a larger percentage of US Treasury Notes and US Treasury Bonds. However, during this period, they deviated from this historical policy.įor the first time since the early 1990’s, the Fed purchased Federal Agency and GSE mortgage-backed securities as part of their SOMA holdings. Traditionally, under Open Market Operations, the Fed would buy mostly short-term US Treasury securities to avoid credit risk and interest rate risk.
This resulted in a massive expansion of their balance sheet, from a pre-crisis $850 billion to a peak of almost $9 trillion.
UPCOMING FED MEETING SERIES
Next, using Open Market Operations, the Fed embarked on a series of Large-Scale Asset Purchases, more commonly known as Quantitative Easing (QE,) to try to stimulate the economy and add liquidity to the system. Once they reached the Zero Lower Bound, they turned to more unconventional methods. They changed their methods of operations in several ways to address the crisis.įirst, they used their most effective monetary policy tool by cutting the Fed Funds Rate to almost zero. The Fed was very aggressive at that time in their efforts to prevent the economy from collapsing. To understand the current situation, it is helpful to look back to the Great Financial Crisis (GFC) of 2008. This will match the highest rate in 22 years, since February 2001.īehind the scenes, though, the Fed has reached another milestone, as their other component of monetary policy, Quantitative Tightening (QT,) has resulted in the Fed’s System Open Market Account (SOMA) contracting by $1 trillion since the Fed began tightening.Īfter peaking at $8.8 trillion in April 2022, the Fed’s SOMA portfolio now stands at $7.8 trillion. This will bring the Fed Funds Rate to the range of 5.25%-5.50%, a 525 basis point increase over the past 16 months. The expectation is that they will raise the Fed Funds Rate another 25 basis points for their 11 th rate hike in the last 12 FOMC meetings.
All eyes are on what the Fed will do with interest rates after the July 25-26 th FOMC meeting next week.
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