Federal Reserve Governor Christopher Waller said on Friday that he’d like to see the Fed’s holdings of mortgage-backed securities drop to zero.
“Agency MBS holdings have been slow to run off the portfolio, at a recent monthly average of about $15B, because the underlying mortgages have very low interest rates and prepayments are quite small,” he said, according to the prepared text of a speech. “I believe it is important to see a continued reduction in these holdings.”
At Feb. 28, 2024, the Fed had $2.40T of MBS on its balance sheet. That’s down from $2.62T at Dec. 29, 2021.
He would also like to see the central bank shift a larger proportion of its Treasury holdings toward shorter-dated securities.
“Moving toward more Treasury bills would shift the maturity structure more toward our policy rate — the overnight federal funds rate — and allow our income and expenses to rise and fall together as the FOMC increases and cuts the target range,” he said.
At Feb. 28, the Fed held $210.4B of Treasury bills out of its $4.66T of total U.S. Treasury securities held.
That would also help with future asset purchase programs because it would let short-term securities roll off the portfolio and not increase the balance sheet, Waller added. “This is an issue the FOMC will need to decide in the next couple of years.”
Mortgage and MBS ETFs to watch: BATS:REM, NYSEARCA:MORT, NYSE:DMO.
