Three Central Banks Watch, 6/11

As the balance sheet burns

The New York Fed has a long and very useful report on its balance sheet. One relatively minor excerpt, concerning their projections for the future:

The baseline paths for the federal funds rate and longer-term interest rates are drawn from responses to the March Desk Surveys. In these surveys, the median expected level of the effective federal funds rate is assumed to rise to 2.625 percent by year-end 2024 and to fall to 2.25 percent in the longer term. In the surveys, the ten-year Treasury yield and thirty-year fixed primary mortgage rates rise to 2.5 percent and 4.4 percent, respectively, in the longer run.

The mortgage rate as of May 26 was already at 5.1 percent, which is above the long-run projection. For background, I suggest going back and reading my original Three Central Banks post.

As I read it, the Fed’s balance sheet is going to shrink only a bit for the next few years, and then keep growing forever after that. If I understand correctly, this means remaining at “crisis levels” (i.e., the levels attained as the Fed responded to the 2008 financial crisis and the 2020 COVID crisis) pretty much forever. A classic Higgsian ratchet.