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Significance
The Fed will cut the balance sheet by USD95bn per month by not reinvesting the proceeds of maturing Treasury bonds and agency-backed mortgage bonds. When the Fed reduced the balance sheet in 2019, a liquidity squeeze emerged in the short-term lending market. There could be a repeat if the Fed moves too quickly.
Impacts
Ten-year treasury yields have risen to 4% and mortgage rates to 7%, increasing the cost of new borrowing and of servicing existing debt.
Banks who bought large volumes of longer-run Treasury bonds when rates were low face credit rating downgrades.
Some observers question the Fed commitment to 2% inflation, as this could prompt the Fed to reduced portfolio sales sooner than expected.
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2023
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