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Federal Reserve Watch: Managing Interest Rates

Apr. 01, 2022 11:09 AM ET1 Comment
John M. Mason profile picture
John M. Mason


  • The Federal Reserve is now maintaining its policy rate of interest at 0.33 percent, with the expectation that several more increases in the rate will be forthcoming this year.
  • The interest rate curve has flattened out, which some analysts believe is a signal that the U.S. economy will go into a recession.
  • However, current levels of inflation are not being fully reflected in overall interest rate levels, so there is some feeling that a recession is not going to happen soon.
  • The Fed's task, for now, is to continue to raise its policy rate of interest and to reduce the size of its securities portfolio, shrinking the balance sheet.
  • It is going to be important for investors to see how the Fed is going to achieve this latter goal, because, as of now, Fed officials have not signaled how they are going to do this.

Federal Reserve Building

jjgervasi/iStock via Getty Images

The Federal Reserve kept the effective Federal Funds rate constant last week at 0.33 percent.

Federal Reserve officials continued to talk about the future increases coming in its policy rate of interest with a few of

This article was written by

John M. Mason profile picture
John M. Mason writes on current monetary and financial events. He is the founder and CEO of New Finance, LLC. Dr. Mason has been President and CEO of two publicly traded financial institutions and the executive vice president and CFO of a third. He has also served as a special assistant to the secretary of the Department of Housing and Urban Development in Washington, D. C. and as a senior economist within the Federal Reserve System. He formerly was on the faculty of the Finance Department, Wharton School, the University of Pennsylvania and was a professor at Penn State University and taught in both the Management Division and the Engineering Division. Dr. Mason has served on the boards of venture capital funds and other private equity funds. He has worked with young entrepreneurs, especially within the urban environment, starting or running companies primarily connected with Information Technology.

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Comments (1)

When the Fed is not making security purchases except to reinvest principal payments it receives, the change in the Fed's security holding from week to week are due to the timing of principal payments on Agency MBS and the timing of the settlement of the MBS purchases the Fed makes to reinvest those payments. In the week ending March 30 the Fed received a payment from Fannie Mae and none of its pending MBS purchases settled. Fannie Mae paid about $23.510 billion. The reason the total decline was about $22.628 billion was because some of the Treasury securities the Fed owns are TIPS (Treasury inflation protected securities). The Fed carries the increase in their principal on its Statement of Conditions as "Inflation compensation" and that increased by about $881 million. That number increases every week until the TIPS mature (unless there is deflation).

The last outright (as apposed to reinvestment of principal) Treasury security purchases the Fed made at the end of its taper were on March 9 and the last outright MBS purchases were on March 11. Some of those MBS purchases will not settle until April 21 and some of the reinvestment of the $23.510 billion payment received last week won't settle until June 21.

The Federal Open Market Committee (FOMC) that sets monetary policy has made it clear they will reduce reinvestment of principal payments to start shrinking the balance sheet soon, perhaps starting shortly after their May 4th meeting.
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