In concert with an announcement today from Senate Banking Chairman Crapo that GSE reform is a meaningful priority in this Congress, Chair Yellen for the first time signaled that the central bank will at some point in the foreseeable future allow its huge book of agency MBS to run off. This is a significant shift in the FRB’s view of how it will conduct monetary policy, one we attribute at least as much to clear signals from the Trump Administration and GOP Congress as to any recent epiphanies at the Fed about the challenges of conducting effective policy without adverse income-inequality impact through a great big book of Fed-selected assets. Regardless, a shift by the Fed out of GSE obligations means less of an interest-rate break for mortgages sold into these securities versus those held on portfolio or – mirabile dictu – moved into the secondary market via PLS.
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