What about the Fed's holdings of mortgage backed securities?

What would happen if the mortgage backed securities (MBS) owned by the Federal Reserve were to significantly decline in value?

Official response from submitted
It depends on what the Federal Reserve would do with such MBS. If it sold them at depressed prices that would have all sorts of effects on the MBS market and on connected other markets. If the Federal Reserve just held the depreciated MBS, that would stand as a loss on the books of the Federal Reserve which would likely have little effect at all. If the Federal Reserve responded by not buying more MBS, that could have major effects on the prices of the whole MBS space and thereby on the housing market generally. That in turn could have major impacts on overall income, employment, etc.

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  • responded with submitted 2016-07-11 23:19:10 -0400
  • responded with incomplete 2016-07-11 23:18:39 -0400
  • published this page in Ask Prof. Wolff 2016-07-09 19:01:59 -0400

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