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Fed’s Balance Sheet Plan

Last week, the political uncertainty that resulted from new allegations against the Trump administration was bad for stocks and good for mortgage rates. With little additional information on the subject emerging this week, investors reversed last week’s moves. The stock market rallied, and mortgage rates moved a little higher.

According to the minutes from the Fed meeting on May 3, which were released on Wednesday, Fed officials broadly agree that the Fed should begin this year to shrink its enormous $4.5 trillion holdings of Treasury securities and mortgage-backed securities (MBS) on its balance sheet. The Fed currently reinvests the principal payments from maturing securities to hold the size of its balance sheet constant. The minutes outlined the method in which this will be changed. Basically, the Fed will announce that a fixed amount of securities will be allowed to run off each month without being reinvested. This amount will increase every three months, meaning that the magnitude of the reduction will pick up over time. Several key details of the plan remain to be revealed. Some of these include when the Fed will begin to shrink its balance sheet, the size of the runoff, and the split between Treasuries and MBS. Mortgage rates declined slightly following the release of the minutes.

The housing data released this week was somewhat disappointing. Sales of both new and previously owned homes in April fell more than expected from March. Despite the decline, sales of previously owned homes, which account for roughly 90% of the market, still were 2% higher than a year ago. According to the National Association of Realtors, a shortage of inventory was a major factor. Total inventory of previously owned homes for sale represented a 4.2-month supply. A 6.0-month supply is considered a healthy balance between buyers and sellers. Properties remained on the market for just 29 days on average in April, down from 34 days in March and 39 days a year ago. This was the shortest duration since tracking began in 2011. Week Ahead

Looking ahead, the Durable Goods report and the second estimate of first quarter gross domestic product (GDP) will be released on Friday. The core Personal Consumption Expenditures (PCE) Price Index, the inflation indicator favored by the Fed, will come out on May 30. The Institute for Supply Management (ISM) Manufacturing Index will be released on June 1. The next Employment Report will come out on June 2..

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