NY Fed Disagrees With Minutes: Does Not Expect Balance Sheet Renormalization Until Mid-2018

Tyler Durden's picture

With the question of the Fed's portfolio normalization now all the rage, accentuated by yesterday's FOMC Minutes announcement that runoff could start later this year - even as many traders admit nobody has any idea what will happen if and when the Fed starts reducing its holdings, mostly of MBS - on Thursday the NY Fed, the Fed's trading desk, provided a glimpse into its thinking on how this will play out in its latest Domestic Market Operations annual report.

According to the report, the Fed's bond holdings could drop to about $2.8 trillion by the end of 2021 - a $1.7 trillion reduction over the next 5 years - with the New York Fed now projecting its balance sheet will reach a "normalized" state some two quarter earlier however with approximately $600 billion more assets than in a year-ago estimate. The U.S. central bank currently has some $4.5 trillion in Treasury and mortgage bonds.

To be sure, many things can and will happen between now and 2021, including the US may have a new president.

Which is why what we found more interesting was the NY Fed's own forecast on the start of renormalization, which disagreed with the FOMC Minutes, in that Bill Dudley's Fed does not expect the Fed to start "renormalizing" until mid-2018, to wit: "the size of the SOMA portfolio is projected to remain largely unchanged at its current level of approximately $4.2 trillion through mid-2018, while full reinvestments continue."

What happens to the balance sheet then:

After that date, it starts to decline as reinvestments are phased out and then ended altogether in mid-2019. The Federal Reserve’s securities holdings then decline until the portfolio reaches its normalized size in the fourth quarter of 2021 (Chart 26). At that time, the domestic securities portfolio is estimated to be about $2.8 trillion, with a slightly higher concentration in Treasury securities than in agency MBS. Thereafter, Treasury-driven growth of securities holdings supports trend balance sheet growth, and agency debt and agency MBS holdings continue to run off.

The NY Fed on suspension of reinvestments vs outright selling:

Once the FOMC ends reinvestments, the pace of the reduction in the size of the SOMA portfolio will largely be driven by the pace of principal receipts from SOMA securities holdings (Chart 27). The timing of principal payments from maturing Treasury securities and agency debt securities is a known function of current SOMA holdings. In contrast, projected principal pay-downs associated with agency MBS are model-based estimates that are subject to considerable uncertainty because of the embedded prepayment option. The actual pay-down path will depend on a variety of factors, including the path of interest rates, changes in housing prices, credit conditions, and other government policy initiatives.

Finally, how the latest forecast differs from last years:

The point of normalization in late 2021 is projected to occur almost two quarters earlier than in the 2015 baseline (Chart 28). The balance sheet starts to contract just over a year later than it was expected to in the 2015 baseline given a longer-than-previously anticipated period for reinvestments to continue. (The December 2015 baseline was modeled on an assumption that reinvestments would begin to be phased out in the first half of 2017.) However, a larger long-run balance sheet size in the current baseline, driven by the assumption about a higher level of reserve balance liabilities in a future policy implementation framework, requires less of the portfolio to run off once such a contraction starts.

And some parting words:

Of course, banks’ demand for reserves and the level of reserves the FOMC will choose to maintain in its long-run policy implementation framework remain uncertain. A set of alternative scenarios highlights  the sensitivity of SOMA portfolio balances to different long-run levels of Federal Reserve liabilities. These scenarios illustrate the degree to which increases (decreases) in liabilities imply a larger (smaller)  level of the SOMA in the long run and how long it might take to achieve a normalized portfolio size. While the projections are modeled with regard to alternative levels of reserve balances, the specific type  of liability is not material; the effect on SOMA portfolio balances would be similar if the alternative levels of liabilities arose from changes in other line items, such as Federal Reserve notes, the TGA, the  foreign repo pool, or DFMU balances.


Under a scenario in which reserve balances are $100 billion in the long run (the baseline in prior years’ reports), the size of the balance sheet is normalized in the fourth quarter of 2022, approximately one  year later than in the baseline scenario (Chart 29). In contrast, under a scenario in which reserves are $1 trillion in the long run, the size of the balance sheet is normalized in the fourth quarter of 2020,  nearly one year sooner than in the baseline. Given that Treasury purchases resume at an earlier date, by the end of the forecast horizon the portfolio is more heavily weighted to Treasury securities than it is  in the baseline scenario.

In other words, if all goes according to plan, the Fed will consider its "renormalization" mission complete in about 5 years, at which point it will have no qualms about launching even more QE if it has to.


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hedgeless_horseman's picture

Simon Potter would know.


Executive Vice President 
Markets Group 
Federal Reserve Bank of New York 
33 Liberty Street 
New York, NY 10045 

Phone (212) 720-6309

When the Federal Reserve finally decides to raise short-term interest rates from near zero, it will be Simon Potter’s job to make it happen.



Looney's picture


The Fed and OPEC are very similar.

For a very long time, both cartels have been manipulating prices while destroying the Free Markets.

Now, OPEC has lost control – whatever they pretend to do doesn’t work anymore. Their “deals” and jawboning might move the price of oil for a few hours, but it always comes back down.

What’s happening to OPEC is a sneak peek at the upcoming Fed’s troubles. I think?  ;-)


Silver Bug's picture

The clowns over at the FED are a complete and utter joke, they are nothing more than manipulators.



JRobby's picture

Because they shredded all the purchase records in advance of a possible audit and have to "create" new ones??????????

hedgeless_horseman's picture


No audits are necessary.  I promise that The Fed paid absolute top dollar when purchasing that crap from the very same banks that own The Fed.

Privatize the gains, socialize the losses.



6.  Read, The Creature from Jekyll Island: A Second Look at the Federal Reserve - 5th Edition, by G. Edward Griffin.

LawsofPhysics's picture

Talking about "prices" in the absence of true price discovery is moronic.  Think about the real value of something like oil (reduced hydrocarbons and consumable calories).  Is this a useful thing?

When they do "lose control" I don't think those "prices" will be going down...

TeethVillage88s's picture

Talking about "prices" in the presence of Oligopolies, Monopolies, Global Behemoths, and Govt Supported Hi-Tech Companies... seems worth mentioning here also.

spastic_colon's picture

this was an orchestrated rebuttal; they need to keep the narrative of a growing economy without the need for higher rates; they are screwed.

quadraspleen's picture



TeethVillage88s's picture

Want to increase the cost of US Domestic Oil & Gas... then open US Petro to sales by export to foreign nations like in 2014...

- oops sorry America, you now have to pay heating costs & Gasoline Prices like Germany... the demand for commodities like Petro has increased and there is no way to speculate or control the market

LawsofPhysics's picture


"Full faith and credit"


2_legs_bahhhhhd's picture

There are two kinds of bankers.

Liers and fucking liers.

vote_libertarian_party's picture

Rrrrrrright.  And who is going to buy these trillions in assets?  And the trillions in new Treasury bonds?


Thems is some powerfull happy drugs they are smoking.

Arnold's picture

Saudi should have some spare coin, once the Aramco IPO comes on line.

mily's picture

What a fantasy, drop couple of trillion worth of bonds without adverse impact on price, another creditibility saving bluff

Arnold's picture

Note to self:

Discontinue making Trial Balloons out of lead.

--Da Fed

Arnold's picture


What happened to Hilsenrath, who used to do all this dirty work for us?

--Da Fed

mily's picture

They will be talking about it for next two years until recession arrives so they dont have to do it

DavidC's picture

They really are pathetic.


Bill of Rights's picture

See what I mean? fucken retards....

LawsofPhysics's picture

Yep, remember this one;

"once unemployment goes below 6.5% we will begine to normalize rates" - Ben Bernanke

He told this to congress, why is he not on trial for perjury?

"Full faith and credit"

RagaMuffin's picture

Doing God's Work at Citadel?

TeethVillage88s's picture

So NY Fed OMO Report is ...

- Michael Strine, First Vice President, New York, Alternate Committee Member
- William Dudley, President, New York

mily's picture

He didnt have "courage to act" after all

RagaMuffin's picture

If the Republicans want to have some cheap fun. Pass a fiduciary requirement for the FED. It just might force the issue of normalization.....

Soul Glow's picture

Wall Street's gotta make that money ya'll!

Bam_Man's picture

100% pure, unadulterated BULLSH*T.

When the upcoming recession hits, their balance sheet will become bigger than ever.

Then they will start TALKING about "normalizing" by 2030.

I Write Code's picture

Well, let's see.  They print four trillion dollars and buy a lot of bad bonds (at prices never revealed).  Bonds mature.  Now they have four billion dollars in CASH sitting in a big pile in the middle of the floor.  And now they're going to "renormalize" it.  That's a nice term for stuffing four trillion cash into bags and loading them into the back of your SUV.

Houses Depreciate's picture

Why do bears keep underestimating the power of economy accelerating, job creating price declines?

LawsofPhysics's picture

"Why do bear keep underestimating the power of mark to fantasy accounting and the ability to create as much currency as you want with no real work or risk?" - FIFY

shizzledizzle's picture

Exactly what I been saying and I'll go further to say it won't happen in 2018 either.

chicken_goose's picture

Lol, one small decline in the market and suddenly they are already walking it back. These people are a joke.

TeethVillage88s's picture

We are seeing visual proof of a Riff between DC Fed Board of Governors/Committee and NY Federal Reserve?

" At that time, the domestic securities portfolio is estimated to be about $2.8 trillion, with a slightly higher concentration in Treasury securities than in agency MBS. "

Hm... Looks like $1.8 Trillion MBS at Fed... oh well their numbers never make sense.


Mortgage-backed securities held by the Federal Reserve: All Maturities (MBST)
2017-03-29: 1,769,118 (+ more) Millions of Dollars, Not Seasonally Adjusted

Treasuries held by Fed, $2.46 Trillion

All Federal Reserve Banks - Total Assets, Eliminations from Consolidation
2014-10-22: 4,481,616 Millions of Dollars (old data)
Weekly, As of Wednesday, Not Seasonally Adjusted, WALCL, Updated: 2014-10-23


Mortgage Debt Outstanding, All holders
2014:Q2: 13,322,621.600 Millions of Dollars (Old Data)
Quarterly, End of Period, Not Seasonally Adjusted, MDOAH, Updated: 2014-09-18

I am Jobe's picture

O fuck. I am not sure their wife/hookers/pimps/ all put up with these guys. 

back to basics's picture

They didn't like the market reaction to the minutes yesterday so they put this out today. And some articles appearing on here as well as a horde of posters still expect this market to crash at some point !!! 

It ain't happening folks, an absurdly inflated equities market is all they got to hang on to and they will keep it up even if means breaking every rule in the book which they already have  

There is no market anymore, they fucking own it all, which part of this people still don't understand? 

Arnold's picture

I'm glad you agree with my shoe shine boy.

back to basics's picture

Then your shoe shine boy must have more money than you, Arnold, because he hasn't been stupid enough to short this fraud of a market. 

Seasmoke's picture

Just a fucking bunch of counterfeiters. Fuck The Fed !!!

orangegeek's picture

...Bill Dudley's Fed does not expect the Fed to start "renormalizing" until mid-2018...


yes - that fucking cunt leaves Feb 2018 and so selling off leaves the market roll in Trump's lap.


oh gee, couldn't see that coming.



Gorgeous's picture

Hand delivered note from NY Fed: "Dear Janet, did we not tell you to say?  How did you manage to screw it up?  The next note will be accompanied by a little gift, if needed"