Abstract
The Federal Reserve has signaled an upcoming change in the use of its balance sheet to support accommodative monetary policy conditions. This change in policy will mark the start of a process to shrink a balance sheet that has grown from under $1 trillion in 2006 to over $4.5 trillion today. Since a significant portion of the assets on the Federal Reserve’s balance sheet consists of mortgage-backed securities (MBSs), the removal of monetary policy support to the secondary mortgage market carries with it many unknowns and brings into question the future role of support to the housing sector in monetary policy. While the near-term market impact may be relatively light, the authors assess the unintended consequences of shrinking the Fed’s balance sheet that may arise due to long-term considerations in the mortgage market.
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