Thread by @NickTimiraos

Investors are blaming the Fed's portfolio runoff for the return of market volatility. A few facts worth considering:

1) While the Fed began allowing $50 billion to mature every month last fall, actual monthly redemptions are lower, close to $40 billion

2) There are essentially two ways to show the effects of the balance sheet runoff. One is on the asset side. An increase in Treasury supply (from the net decline in Fed holdings) should lead to lower prices and higher yields, via a higher term premium. This has not happened.

3) The Fed is also redeeming mortgage bonds, putting more supply in private hands. MBS markets have seen some spread widening against Treasuries, but spreads have widened less than might have been expected.

4) So it is hard to point to big effects from the runoff in the two markets where the Fed concentrated their $3+ trillion in asset purchases.

What about the liability side? Reserves are shrinking, pulling "liquidity" out of the market. But reserves have been shrinking for years

5) Thus concludes JPM's Feroli on the balance sheet runoff-fueled market anxieties: "The notion that somehow there is less Fed ‘liquidity’ spilling into markets is evocative language, but also utterly meaningless." wsj.com/articles/a-4-t…

6) One final argument often heard goes like this: bond-buying programs pushed investors to take risk, so the reverse should lead them to buy more Treasuries and fewer risky assets (corporates, stocks). Treasury supply is crowding out other, riskier asset classes.

7) If this is true, one question: Since net new Treasury issuance to fund rising deficits is quantitatively much larger than the Fed's net redemptions, why is the balance sheet runoff, as opposed to higher budget deficits, the scapegoat for volatility?