Fed To Begin Quantitative Tightening ‘Relatively Soon’

The Federal Open Market Committee in June voted to maintain the current Federal Funds rate at 1.0%-1.25%, raising renewed questions regarding how many more times the Fed will hike this year.

Some economists say the Fed will likely be more focused on its plan for reducing its holdings in mortgage-backed securities (MBS) and Treasuries in the months to come (the so-called “Quantitative Tightening”), which could have the effect of delaying future rate hikes, depending on how the markets react.

Currently, the Fed’s balance sheet stands at approximately $4.52 trillion, about $2.46 trillion of which are Treasuries and about $1.77 trillion of which are MBS. It acquired about $3.7 trillion of these assets in the years following the recession as part of its Troubled Asset Relief Program. The Fed plans to reduce its balance sheet gradually by not reinvesting in the bonds as they mature.

“We believe that both the market and the Fed will be much more concerned with how the balance sheet normalization will go and we expect the Fed to begin the normalization sometime before the end of the year,” says Brett Ewing, chief market strategist for First Franklin Financial Services, in a statement. “It will likely use the remaining two press conferences to focus on questions the market may have.”

Ewing adds: “If the Fed can get the unwind off and running successfully without upsetting markets, we expect Janet Yellen to step down as Fed Chair and Gary Cohn to take over in 2018.”

“For the time being, the committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction,” the FOMC says in its statement. “The committee expects to begin implementing its balance sheet normalization program relatively soon, provided that the economy evolves broadly as anticipated; this program is described in the June 2017 Addendum to the Committee’s Policy Normalization Principles and Plans.”


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