Federal Reserve Governor Christopher Waller has indicated that it could take another decade for the Federal Reserve to eliminate its holdings of mortgage-backed securities (MBS). His comments come as the Fed continues a passive runoff strategy, currently reducing MBS holdings by approximately $15 billion to $17 billion per month. As of June 2026, the Fed’s balance sheet includes about $1.96 trillion in MBS, with a redemption cap set at $35 billion. This extended timeline for MBS reduction suggests the Fed’s balance sheet will remain heavily weighted toward mortgage securities, rather than shifting more toward U.S. Treasuries as some officials prefer.

Market participants appear to interpret Waller’s comments as indicative of a prolonged period of accommodative monetary policy, which may influence expectations around Federal Reserve interest rate decisions. Currently, markets show a 60.5% probability that there will be no change in interest rates following the Fed’s July 2026 meeting, down from 80% just 24 hours ago. This shift suggests a growing belief that the Fed might continue its accommodative stance longer than previously anticipated.

The Fed’s strategy and balance sheet composition are significant factors in interest rate expectations. Waller’s statement aligns with a scenario where the Fed maintains a cautious approach to monetary tightening, potentially affecting future rate decisions.

Key Takeaways

• Waller’s comments suggest a long-term MBS reduction strategy, consistent with expectations of prolonged accommodative monetary policy.
• Pricing indicates a decrease in confidence that the Fed will maintain interest rates post-July 2026 meeting, with a drop from 80% to 60.5% YES.
• The Fed’s current MBS-heavy portfolio may indicate ongoing cautiousness in shifting toward Treasuries, impacting interest rate projections.

What to Watch

Keep an eye on upcoming Federal Reserve meetings and any statements from key figures like Jerome Powell and Stephen Miran that could influence interest rate expectations further. Additionally, watch for economic indicators such as inflation and unemployment rates, which could impact the Fed’s policy direction. These developments will provide insights into whether the Fed’s approach will remain consistent with current market pricing of interest rate scenarios.

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