Wall Street sees Fed balance sheet normalisation plan by year end — Reuters poll
NEW YORK: Wall Street’s top banks see the Federal Reserve laying out by year end its plan to scale back reinvestments in Treasuries and mortgage-backed securities in order to begin shrinking its US$ 4.5 trillion balance sheet, a Reuters poll showed.
Five of 15 primary dealers, or banks that do business directly with the US central bank, expected the Fed to start paring reinvestments by year end, while the rest forecast the central bank would do so by the end of the second quarter of 2018. The median view of 11 dealers was for the Fed to eventually shrink its balance sheet to US$ 2.75 trillion.
As the US central bank seems prepared to tackle unwinding its bond holdings, primary dealers see the Fed raising interest rates two more times by year end and three times in 2018.
Fed policymakers have turned their focus to paring the central bank’s massive bond holdings, as shown in the minutes of their March policy meeting released on Wednesday.
Last month, the Fed raised rates by a quarter percentage point to 0.75 to one per cent amid signs of an improving US economy and stock prices reaching record highs.
The central bank amassed its Treasuries and MBS during three rounds of large- scale purchases known as quantitative easing, which was aimed to lower longterm borrowing costs and combat the repercussions of a severe recession that was exacerbated by the global credit crisis more than eight years ago.
On Wednesday, the Fed held US$ 2.46 trillion in Treasuries and US$ 1.77 trillion in MBS.
While the Fed has longed to reduce those holdings, it has been reluctant to do so due to concerns that buying fewer bonds could cause a spike in mortgage rates and other long-term borrowing costs and hurt an economy that has been stuck at a two per cent growth rate.
The Fed’s willingness to embark on this change came after Donald Trump’s surprise US presidential victory in November, which unleashed hopes of tax cuts, looser regulations and infrastructure spending to bolster business investments and job growth.