Trump administration hedges against Federal Reserve's balance sheet reduction: The policy game behind the MBS plan

U.S. Treasury Secretary Yellen recently clarified the true goal behind the Trump administration’s MBS purchase plan: directly hedging the Federal Reserve’s balance sheet reduction operations. This is not just a technical policy adjustment but also reflects a fundamental disagreement between the Trump administration and the Fed on monetary policy direction.

Core Objectives of the MBS Plan

According to the latest reports, Yellen explicitly stated in an interview with Reuters that the Trump administration’s MBS purchases will “roughly match” the pace at which the Federal Reserve is shrinking these bonds from its balance sheet. Specifically, the Fed is currently rolling off about $15 billion in bonds each month, and the Trump administration’s MBS plan aims to purchase at a similar scale and speed, creating a “hedging” effect.

In Yellen’s own words: “The reality is that the Fed is rolling off about $15 billion in bonds each month, so I think the idea is to roughly match the Fed’s actions, which have been pushing in the opposite direction.”

Disagreements Behind the Policy

This move clearly exposes the current opposition between the U.S. government and the Federal Reserve on monetary policy:

Fed’s stance

The Fed insists on shrinking its balance sheet, trying to absorb liquidity from the economy to combat inflation. This is a manifestation of tightening policy.

Trump administration’s intent

The Trump administration injects liquidity into the economy through MBS purchases, attempting to offset the Fed’s tightening effects. This reflects the Trump administration’s preference for a loose monetary environment—low interest rates are more conducive to economic growth and asset prices.

The two form a “counteracting” force, and Yellen’s statement precisely illustrates this opposition.

Political Context Intensifies

It is noteworthy that this policy rollout coincides with a sensitive period when Fed Chair Powell faces a criminal investigation. According to reports, Powell recently stated he is under criminal investigation and refuses to succumb to Trump’s intimidation. Trump denies involvement in Justice Department subpoena actions but has criticized Powell’s performance at the Fed.

In this political environment, the MBS purchase plan is not only an economic policy but also part of a political game.

Market Impact Analysis

This policy could have several implications:

• Liquidity landscape: MBS purchases help maintain ample liquidity in financial markets, generally benefiting stocks and risk assets
• Interest rate environment: Increasing MBS supply may help lower long-term interest rates, especially mortgage rates
• Dollar trend: Loose liquidity policies could exert some pressure on the USD
• Crypto markets: A loose liquidity environment is often seen as supportive of risk assets, including cryptocurrencies

Key Focus for Follow-up

The trajectory of this policy game depends on several factors:

• Whether the Fed will adjust its balance sheet reduction policy under political pressure
• The actual scale of the Trump administration’s MBS purchases
• Progress in Powell’s criminal investigation
• Recent U.S. economic data such as CPI (Consumer Price Index) releases this week for December

Summary

The Trump administration’s MBS purchase plan essentially acts as a direct hedge against the Fed’s balance sheet reduction, reflecting a fundamental divergence in monetary policy directions. The Trump administration aims to maintain a loose liquidity environment, while the Fed remains committed to tightening. This policy opposition is especially prominent amid the current political conflict between Trump and Powell. In the short term, such hedging may help sustain market liquidity and asset prices, but the long-term effectiveness remains to be seen. The upcoming U.S. CPI data release this week will serve as an important indicator to evaluate this policy framework.