Fed balance sheet runoff hits a new development

The Fed accumulated the bonds during its economic stimulus program that began in late 2008 during the financial crisis. The balance sheet had hit more than $4.5 trillion at one point, while the runoff program has resulted in a reduction of more than $100 billion so far.

Fed officials noted that the MBS market is sensitive to long-term rates, so lower yields later could result in the need to reinvest again.

The MBS discussion came as the FOMC approved an adjustment in the rate it pays on excess reserves that banks hold with the Fed.

While it approved a quarter-point rate increase in the funds rate, it raised the interest on excess reserves rate only 0.2 percentage point. The funds rate had been moving to the top end of its range and getting close to the IOER rate. The Fed uses IOER as a guidepost for its benchmark funds rate.

Since that move was approved, the funds rate again has jumped to the top of its range and most recently was within 0.04 point of the IOER. Fed officials in June said the reason the funds rate was moving higher could be due to higher rates in the overnight repo market.

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