Fed assessing economy before reducing MBS holdings

Following the recent Federal Open Market Committee meeting, Federal Reserve Chairman Jerome Powell announced the central bank will continue purchasing $40 billion of mortgage-backed securities each month. However, he discussed reducing purchases at some point. The initial asset purchases ramped up in 2009, with the Fed ending that year with about $900 billion of MBS on its balance sheet. The amount grew to $1.8 trillion by 2015 before the central bank tapered purchases, and it held $1.4 trillion in 2019. However, last year, the pandemic caused the Fed to resume purchases, and the bank had $2.1 trillion on its balance sheet at the end of last year. At the end of July, the figure was $2.4 trillion.

Meanwhile, the size of the MBS market fell to $8.7 trillion in 2013 from 2009's $9.4 trillion. Then, the market started expanding again, reaching $11.2 trillion by the end of 2020.

With an enlarged balance sheet and smaller MBS market, the Fed's share reached 20% in 2014 before shrinking from 2016 to 2019. In 2019, the Fed owned 14% of the outstanding MBS, but its share jumped to 18% last year.