I had a good meeting with a client the other day. This client acts as trustee for one of his good friends and, in my opinion, this friend is very lucky to have him.
In any event, we were talking about bonds and interest rates. One of the main arguments for those who see inflationary pressures building is the huge amount of liquidity that the Fed pumped into the financial system during the credit crisis in late 2008. Lots of easy money, these inflation hawks suggest, will enviably lead to inflation.
However, when I mentioned this point to my client the other day, he simply said, "All the Fed has to do is sell the mortgage-backed securities it holds, and that liquidity vanishes". And I think he's right.
Today's Wall Street Journal has a good article about the internal discussion at the Fed regarding their plans for $1 trillion in mortgage-backed holdings (nearly all guaranteed by Fannie Mae, Ginnie Mae or Freddie Mac).
Fed to Discuss Mortgage-Bond Sales - WSJ.com
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