Calamity Jane has just spoken. The US Federal Reserve released their minutes to the March meeting- which indicates they will change their “reinvestment policy”.
The Fed has a reinvestment policy?...
Yes! Well it does now.
Since the Global Financial Crisis, the US Federal Reserve embarked on 3 rounds of stimulus to kick start the US economy. They own a total of $4.5 Trillion of bonds (which are primarily Treasuries and mortgage-backed-securities), which they accumulated through massive bond buying, money printing, or quantitative easing programs (depending on which term you prefer).
The $4.5 trillion sits as an asset on the Fed’s balance sheet, and some of these securities are coming up for maturity (or repayment by the issuer) this year. The $4.5 trillion dollar questions are:
Thank you
Should the Fed opt for #1 and not reinvest in these bonds, the instant affect will be that money supply tightens. Tighter money usually brings on higher interest rates. This is because the supply of bonds will likely remain, but the demand (from the Fed) won’t be part of the equation. Issuers of these bonds will have to find new investors, paying higher interest rates to attract them, and at the same time essentially hoover up existing money supply.
If these issuers have to pay higher interest rates… so will Main Street. That is you and me.
Fed tapering reinvestment
So that leaves option 2. But will reinvestment be everything, or a tapered version of reinvestment? The Fed doesn’t have an answer just yet, but the recent Fed meeting minutes clearly flag that they will develop a policy – a reinvestment policy, which will be communicated “As it becomes available”.
What is certain, is interest rates will rise one way or another.
