Why the Fed had to buy these fixed income securities

In an attempt to rescue a financial system (XLF) under immense pressure after the collapse of Lehman Brothers, the US Federal Reserve started purchasing huge quantities of fixed income securities (AGG). The Fed felt that it had to take this approach because the normal policy tools available at that time were proving inadequate. And with the US interest rates near 0%, there was no scope for further rate cuts to stimulate the economy. In this way, a series of quantitative easing programs came into being.

Inside the Fed’s Balance Sheet (The Biggest in the World)

These securities were primarily US government-backed Treasuries (TLT) and mortgage-backed securities (MBG). In January 2008, the Fed’s balance sheet was at $147 billion. It rose to $864 billion in January 2009 and has ballooned to $4.4 trillion since then.

In August 2013, the Fed started reducing the purchase of these securities, stopping completely in October 2014. They have only been reinvesting proceeds from the maturing bonds since then. FOMC (Federal Open Market Committee) members now feel that they should have a plan to offload these assets of the balance sheet now that the economy is returning to normal.

The Fed can’t clear its balance sheet immediately

The Fed has started the rate normalization process only recently and has a long way to go before the rates come back to pre-Lehman-collapse levels. So far, the Fed has been successful in raising the interest rate three times without spooking markets (QAI) too much.

It appears now that the Fed will hike the rate at least two more times in 2017, and after that, it will consider offloading these assets from its balance sheets.

In Part 3, we’ll look at the recent speeches by individual Fed members.

Latest articles

This year, Pfizer (PFE) stock has fallen 0.34% and Bristol-Myers Squibb (BMY) stock has fallen 6.48%. Both companies are focused on strengthening their position in the high-growth oncology and immunology markets. Let's take a closer look at each.

Walt Disney’s (DIS) latest movie, Toy Story 4, has reportedly broken records in the opening weekend with $118 million in sales. However, the opening weekend collection was behind analysts’ expectations of at least $150 million in the first weekend.

24 Jun

Will Home Depot’s Upward Momentum to Continue?

WRITTEN BY Rajiv Nanjapla

As of June 21, Home Depot (HD) was trading at $209.39, which implies a rise of 9.7% since the announcement of its first-quarter earnings on May 21. Also, the company was trading at a premium of 32.4% from its 52-week low of $158.09 and a discount of 2.8% from its 52-week high of $215.43.

On June 21, Aurora Cannabis (ACB) made an announcement that indicated that it will move towards higher margin vape products. In addition, the company also believes concentrates and edibles will command higher margins. In anticipation of this development, the company announced the expansion of its facility to capitalize on growth related to these segments.

Shares of Mondelēz International (MDLZ) are scaling new heights thanks to its stellar gains so far this year. Mondelēz stock is up 38.0% on a YTD (year-to-date) basis, and it closed at $55.25—just a shade lower than its 52-week high of $55.71—on June 21.

24 Jun

How Long Will Facebook's Libra Fuel Bitcoin Rally?

WRITTEN BY Mayur Sontakke, CFA, FRM

Ever since the news about Facebook’s (FB) cryptocurrency project broke, Bitcoin has rallied on the hope that Facebook’s entry in the space will help make cryptocurrencies mainstream. Facebook’s cryptocurrency will be called Libra and will be governed by an association with 28 founding members across industries.

172.31.71.127