The Fed’s holdings of Treasurys, mortgage-backed securities and government-agency debt have dropped below $8.6 trillion from a peak of $9 trillion a year ago. Fed officials and economists have acknowledged that shrinking the balance sheet can tighten financial conditions, though they have played down the potential impact. “This is essentially the Fed delivering on that insurance contract.”Officials decided in May 2022 to shrink the Fed’s balance sheet by allowing some maturing debt to roll off. Even the existing runoff has pressed the market for mortgage-backed securities. “One or two years ago, you had constant buying from the Fed,” said Mr. Lim, who manages an exchange-traded fund that invests in interest-only mortgage-backed securities.

Source: Wall Street Journal April 30, 2023 16:13 UTC