This Bloomberg article on the Fed’s possible need for a new “exit plan” is eerie; it is the financial analog of reading the NYT calmly discuss the Administration’s “secret kill list” (their headline).
When I read this, I was perplexed: ““They have to find ways of unwinding the balance sheet without dumping all of it in the marketplace,” said Memani… What does that even mean? How do you unwind your holdings of assets without selling them? I thought maybe Memani was just talking about the timing–letting the assets mature over time, rather than selling them upfront. And it does seem like that’s the plan, with a special twist (in fact a reverse twist):
The Fed could ask to swap longer-term Treasury debt for short-term bills and notes, thus reducing the maturity of its portfolio to accelerate the runoff. The Fed and Treasury could do this partly in a one-time swap, and partly by allowing the Fed to bid on new issues and pay with its holdings of long-term Treasuries, Crandall said.
Because the Fed would have less debt to sell to return its portfolio to a normal size, it could be “more aggressive in the liquidation” of housing-agency securities, he said, which was a priority for Fed officials when they announced the exit strategy.
I haven’t thought this through too carefully, but the above makes 0% sense to me. It’s similar to the platinum coin magic trick: The only way it “works” is if the Fed/Treasury take other offsetting actions that defeat the original purpose.
Can you guys spell out the logic of this proposal? I realize some of you may not endorse it, but perhaps you at least see the superficial thinking here.