Fed's Uneven Treasury Holdings Risk Reviving Market Volatility

The Federal Reserve may find it difficult to minimize market volatility when it begins to slow the reinvestment of its balance sheet given the uneven maturities of its holdings. Analysts expect the Fed will have to decide whether to roll over a certain percentage of its principal or announce a fixed dollar target of its Treasury and mortgage securities to unwind the $4.26 trillion of debt in a “passive and predictable manner.” Under the percentage option, the scale of the Fed’s balance-sheet reduction “will fluctuate significantly” from month-to-month and quarter-to-quarter, “which is just an accident of history,” Wrightson ICAP Chief Economist Lou Crandall said in an April 3 note.

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