All Things in Moderation

Vital Statistics:

Stocks are lower this morning after yesterday’s release of the FOMC minutes. Bonds and MBS are down small.

The FOMC minutes contained details on how the Fed intends to start reducing the size of its balance sheet.

In their discussion, all participants agreed that elevated inflation and tight labor market conditions warranted commencement of balance sheet runoff at a coming meeting, with a faster pace of decline in securities holdings than over the 2017–19 period. Participants reaffirmed that the Federal Reserve’s securities holdings should be reduced over time in a predictable manner primarily by adjusting the amounts reinvested of principal payments received from securities held in the SOMA. Principal payments received from securities held in the SOMA would be reinvested to the extent they exceeded monthly caps. Several participants remarked that they would be comfortable with relatively high monthly caps or no caps. Some other participants noted that monthly caps for Treasury securities should take into consideration potential risks to market functioning. Participants generally agreed that monthly caps of about $60 billion for Treasury securities and about $35 billion for agency MBS would likely be appropriate. Participants also generally agreed that the caps could be phased in over a period of three months or modestly longer if market conditions warrant.

In the discussion about rate policy, it sounded like absent the invasion of Ukraine, the Fed would have hiked by 50 basis points. The uncertainty over how the war would affect the economy drove the cautious decision to only increase by 25. By May, any lingering uncertainty will be gone, and it sounds like a 50 basis point hike is a foregone conclusion.

St. Louis Fed Head James Bullard said the central bank is “well behind the curve” in getting inflation under control. He is a hawk and was one of the voters to recommend a 50 basis point hike at the last meeting. He also said that the economy is generally strong, with low unemployment and decent growth. He also added that there are technical factors affecting the shape of the yield curve which reduce its efficacy as a potential recession indicator.

Black Knight Financial Services is in play, according to a report in Housing Wire. Private Equity firms were supposedly the interested suitors. I cannot imagine Intercontinental Exchange, which owns Ellie Mae, would be permitted to buy the company given antitrust concerns.

Mortgage credit availability decreased in March, according to the MBA’s Mortgage Credit Availability Index. “Overall credit availability was down slightly in March, driven by a reduction in higher LTV and lower credit score programs,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Credit availability has gradually trended higher since mid-2021 but remains around 30 percent tighter than it was in early 2020.”

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