Markets are keen to find out the Fed’s plan to shrink its $ 9 trillion

Markets are seeking information on how the Federal Reserve plans to shrink its huge $ 9 trillion balance sheet. They will receive their wishes later today if the Fed releases the minutes of its March meeting.

Last month, Fed Chair Jerome Powell said the central bank had made “excellent progress” on the balance sheet and that the parameters would come in minutes.

“We’ll get some information tomorrow, hopefully enough to satisfy the market,” said Kathy Bostjansic, director of the US macro investor service at Oxford Economics.

He said he was concerned that the market was expecting too much.

“Whether they will give us a basic plan, whether they will give us specific directions, I am somehow skeptical,” he said.

The Fed’s balance sheet size doubled to $ 9 trillion during the epidemic as the central bank bought trillions of treasury and mortgage-backed securities, first to protect the US bond market from losses and then to help the economy recover.

Under the Fed’s thinking, the large balance sheet is pushing down long-term rates – stimulating the economy. This is no longer appropriate with the highest rate of inflation in 40 years.

The effects of shrinking balance sheets – sometimes called quantitative tightening – are not well understood.

“No one has a very clear vision of what the balance sheet is – especially as big as it is now – in the financial markets and the economy,” said Seth Carpenter, Morgan’s global chief economist. Stanley, at a recent NABE conference.

Will be released before 2 pm.

The market and the Fed are somewhat on the verge of shrinking balance sheets.

Wednesday, yields on 10-year Treasury notes
TMUBMUSD10Y,
2.613%
The rise continued after Fed Governor Lael Brainard said the Fed would shrink its balance sheet at a “rapid” pace. Stock
DJIA,
-0.46%

SPX,
-0.97%
Less open, continued losses from previous trading sessions.

The Fed has shrunk its balance sheet only once before – from 2017-2019. It went well, until it happened.

Beginning in October 2017, the Fed was able to shrink its balance sheet from $ 4.2 trillion to $ 3.6 trillion. But in September 2019, money market volatility forced the Fed to stop shrinking its balance sheet and buy treasury to add liquidity to the banking system.

The Fed’s expectations are different this time. To avoid instability, the Fed has set up a facility where banks can come to the central bank for emergency reserves.

For now, the Fed does not plan to sell any securities on its balance sheet.

Instead, the Fed allows mature securities to close the balance sheet and does not reinvest income.

Patrick Harker, president of the Philadelphia Fed, says he wants the balance sheet to be so annoying that it’s “like watching the paint dry.” Goals set it and forget it.

To keep the process running smoothly, the Fed sets monthly “caps” on how many securities it can shut down.

This is almost double the মাসে 50 billion per month of quantitative austerity in 2017-2019.

Wall Street thinks the Fed will eventually allow a monthly $ 80 billion- $ 90 billion roll-off after a slow start – so perhaps $ 50 billion in Treasury and $ 30 billion in mortgage debt.

One difference this time around is that the Fed’s balance sheet has a T-bill.

Economists generally expect the Fed to reduce its balance sheet by $ 3 trillion in three years.

This is a great combination for the market. By mid-2025, private investors will have রাখতে 3 trillion in treasury and mortgages.

The Treasury Department also has a role to play in this process. Since the Fed will no longer buy loans, the Treasury will have to decide where to issue the loans.

The mortgage market is losing a large price sensitive buyer.

The minutes are not expected to announce the start date of the runoff. Analysts believe there is a good chance the announcement will be made after the next Fed meeting on May 3-4.

The minutes could also signal what will put pressure on the Fed to raise its benchmark rate by 50 basis points in May.

Since the March meeting, many Fed officials have said a half-point increase would be “on the table” at the May meeting. Some economists were concerned that starting a quantitative austerity with a 50 basis point rate increase would be too aggressive.

“The minutes probably won’t address the question of how big the May rate hike will be, but only because the committee itself isn’t sure yet,” Lou Crandall, chief economist at Wrightson / ICAP, said in a note to clients.

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