Matt Sekerke (Johns Hopkins) and Steve Hanke argue the Fed's addiction to quantitative easing — particularly its aggressive purchases of mortgage-backed securities and long-duration Treasurys — has distorted the yield curve and starved productive capital.
Their prescription: create a Treasury-managed Resolution Fund that auctions off the Fed's legacy holdings in controlled tranches, mirroring the RTC template from the 1989 S&L unwind. The Fed, they write, cannot credibly reduce its portfolio by selling bonds directly — the market would front-run every announcement.
The Mechanics
The Resolution Fund would auction MBS and long Treasurys in monthly tranches, set by a public schedule, with a price floor tied to a rolling 30-day average. The Fed transfers assets at book; the Treasury absorbs any markdown; the auction market sets the cleanup price.
Why Now
With Warsh signaling he would address Fed independence and affordability, the political window for structural reform is open. Sekerke's point is that if the Fed continues shrinking the balance sheet at its current pace, it will take another decade — and the next crisis will find it out of ammunition.
What This Means For Our Portfolios
- Duration risk is the whole trade. 10Y at 4.29% is still below its 10-year average. If the Sekerke-Hanke plan goes live, long duration sells off hard.
- Short the long end, own the belly. 2Y-5Y is where the reinvestment window sits. TLT is a structural short if this debate gains traction in Senate Banking.
- Financials 16% benefit from a steeper curve. JPM, BAC, WFC, GS. NIM expansion comes back.
- Power/Infra 10% stays exposed. Long-dated project financing (VRT, ETN, GE Vernova) depends on affordable long rates. Watch for headline risk.
- Agency MBS — the sleeper. If the Fed unloads MBS via auction, the agency market reprices wider first. Own call options on FNMA, FMCC.