Fed to shrink balance sheet

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jim584672

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50 billion a month! This is like QE in reverse. I don't think they will actually do it. It is a massive tightening.

Any thoughts?
 
I think that's the maximum they would do. My understanding of their plan is that they would work up to it over time.

Yes, it is essentially QE in reverse, but I don't think it is a massive tightening. It's a lot of money, but compared to the size of the financial markets overall it's not that much.

I think they will do it but they will be data driven and cautious, since this is the first time they've done something like this as far as I know. The reason I think they will is that I think they think they need the balance sheet reduced so they can regain the ability to do QE in the future if the need should arise.
 
Obviously the Fed heard about all the spending the dryer-sheet-recycling crowd is now talking about, and figured it must be time.
 
I don't understand the reasoning that the financial markets are large and would have little effect and yet they want to save it for future QE. Why would that have any effect? Seems to me it QE worked to loosen the markets, and I certainly heart 'Don't fight the FED' enough, than unwinding the balance sheet would tighten it.

Not posted for argument, just don't understand what appears to be two sides of same coin.
 
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They want to knock $2 - $2.5T off the balance sheet. At $50B/mo that's still 3.5-4 years to get it done.

And when they get thru with that they will still have a balance that is larger than anything we've ever seen before the crisis.

If you get someone hooked an amphetamines and crack it takes a while to bring them down...and they will undoubtedly relapse. This may take a generation to fully right the ship.
 
HFWR said:
The news I saw stated they would begin at $6B/mo, increasing by $6B every three months, with a cap of $30B/ mo.

https://www.reuters.com/article/us-usa-fed-idUSKBN1952NA
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It's $30B a month for Treasuries (starting at $6B), and $20B a month for mortgage and agency bonds (starting at $4B), so it totals to $50B a month after 12 months.

The next paragraph added that info.
The initial cap for the reduction of the Fed's Treasuries holdings would be set at $6 billion per month, increasing by $6 billion increments every three months over a 12-month period until it reached $30 billion per month.

For agency debt and mortgage-backed securities, the cap will be $4 billion per month initially, rising by $4 billion at quarterly intervals over a year until it reached $20 billion per month.
Click to expand...
 
The balance sheet would shrink if they just don't replace the bonds that mature.
 
Closet_Gamer said:
They want to knock $2 - $2.5T off the balance sheet. At $50B/mo that's still 3.5-4 years to get it done.

And when they get thru with that they will still have a balance that is larger than anything we've ever seen before the crisis.

If you get someone hooked an amphetamines and crack it takes a while to bring them down...and they will undoubtedly relapse. This may take a generation to fully right the ship.
Click to expand...


This is what I was thinking... still slow IMO...

But, then posts say they are going to start slow and take a year to get to the cap... so now we are talking 5 years....

Or, if you think about it a total of 15 (that is FIFTEEN) YEARS from when the financial crisis first started...

And also as mentioned, they STILL will be way more in assets then previous history... from what I can see on a quick search they had $870 billion before the crisis...

Currently at $4.7 trillion... get rid of $3 trillion you still have $1.7 trillion or almost twice as bid as before the crisis....
 
Texas Proud said:
This is what I was thinking... still slow IMO...

But, then posts say they are going to start slow and take a year to get to the cap... so now we are talking 5 years....

Or, if you think about it a total of 15 (that is FIFTEEN) YEARS from when the financial crisis first started...

And also as mentioned, they STILL will be way more in assets then previous history... from what I can see on a quick search they had $870 billion before the crisis...

Currently at $4.7 trillion... get rid of $3 trillion you still have $1.7 trillion or almost twice as bid as before the crisis....
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I think it's currently around $4.4T and they aim to take it down to $2-2.5T

The Fed's balance sheet would be larger today anyway without QE.

QE was a long process, so it makes sense that the unwind would be long too.

But because the economy has grown and the financial world has changed so much since then, officials say there is no going back to the old level. More likely, these officials say, the Fed will aim for a balance sheet size of $2.5 trillion, or a reduction over several years of about $2 trillion.
...

The biggest reason why there's no going back to the old balance sheet is currency. For a variety of reasons, the amount of currency in circulation has grown 7 percent a year on average over the past five years, or 3 percentage points faster than in the five years before the crisis. People are simply expressing a desire to hold more cash — ironic in a financial world that is growing more digital — and the central bank's job is to simply meet that desire for cash passively.

About $1.5 trillion of cash is currently in circulation and, if current growth rates continue, that level will be north of $2 trillion in the next five years, providing a floor for just how small the balance sheet can get.

Other factors will combine to keep it large. Unlike before the crisis, the Treasury now keeps most of its money on account at the Fed. At the end of 2007, the Treasury kept just $4.5 billion at the Fed; by the end of 2016, it was $374 billion. Most banking experts think this is a good idea. Commercial banks, which used to service the Treasury's general account, are now subject to capital and liquidity requirements that make holding the Treasury account too costly. The Fed doesn't have to follow those rules.

The same is true for foreign central banks, which hold an additional $250 billion on account at the Fed. Both Treasury and foreign central bank deposits are essentially considered "hot money," meaning it can be quickly withdrawn, threatening liquidity at commercial banks. So experts think it should be on account at the Fed.

Add all three major sources together — currency and Treasury and foreign central bank deposits — and the minimum size of the balance sheet is already easily at $2.5 trillion.
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Fed's new normal balance sheet could be huge
 
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The planned Fed unwind ramps up to half the rate that is was built.
Sometime later this year, the Fed will begin limiting the amount of maturing Treasury securities and mortgage-backed securities that it reinvests, initially bringing its balance sheet down by $10 billion each month as its holdings are redeemed. Those amounts will gradually increase each month until after a year balance sheet reduction reaches a pace of $50 billion per month. That compares with a net increase of $100 billion/month on the way up during QE1. Given current Fed security holdings of $4.2 trillion, this would reduce the Fed's security holdings by about 14% per year once it gets into full swing.
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https://seekingalpha.com/article/4081782-fed-balance-sheet-reduction-scaring-anyone
 
audreyh1 said:
I think it's currently around $4.4T and they aim to take it down to $2-2.5T

The Fed's balance sheet would be larger today anyway without QE.

QE was a long process, so it makes sense that the unwind would be long too.

Fed's new normal balance sheet could be huge
Click to expand...


Thanks for the link...

Help explain why it is going up so much than before... now going to hold the money of the US gvmt and foreign gvmts totaling about $625 billion... that is not quite half of the increase if they keep the BS at $2.5 trill, but it is a big part...
 
Have they bought high quality bonds or high yield? Would be interesting to know how their portfolio have fared?
 
Texas Proud said:
Thanks for the link...

Help explain why it is going up so much than before... now going to hold the money of the US gvmt and foreign gvmts totaling about $625 billion... that is not quite half of the increase if they keep the BS at $2.5 trill, but it is a big part...
Click to expand...

The growth in cash outstanding is the biggest part.
 
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Christine said:
Have they bought high quality bonds or high yield? Would be interesting to know how their portfolio have fared?
Click to expand...

Treasuries, mortgage, and agency paper. No corporate or high yield there.

How did their portfolio fare? Well, interest rates came down as bonds were purchased.....making the bonds more valuable.
 
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So I wonder what effect this will have on Interest Rates going forward ?

Will they have to increase Rates to attract enough Buyers to fill the void they're leaving behind ??
 
FiveDriver said:
So I wonder what effect this will have on Interest Rates going forward ?

Will they have to increase Rates to attract enough Buyers to fill the void they're leaving behind ??
Click to expand...

It's a form of tightening, so you would expect it to put upward pressure on interest rates. But there are many things that influence interest rates - particularly economic outlook and inflation expectations. Interest rates dropped on Thursday as the news about lower than expected CPI and some other weak economic numbers overwhelmed any reaction to the Fed plan.

Back in 2013, when the Fed announced their plan to taper off QE bond purchases, the bond markets threw a "taper tantrum" with a sharp increase in interest rates. But by the time the Fed was done in Dec 14, interest rates had come back done. With the announcement this time - no such market reaction.
 
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Rustic23 said:
I don't understand the reasoning that the financial markets are large and would have little effect and yet they want to save it for future QE. Why would that have any effect? Seems to me it QE worked to loosen the markets, and I certainly heart 'Don't fight the FED' enough, than unwinding the balance sheet would tighten it.

Not posted for argument, just don't understand what appears to be two sides of same coin.
Click to expand...

I think the balance sheet reductions will have a tightening effect. It is the scale of the effect that people are unsure of. A quick Google check shows that the NYSE stock market alone is worth $18T, the NASDAQ is at about $7T and the US bond market is $31T. the Fed is talking about a $2T reduction over a few years. So it's noticeable, but not overwhelming or overpowering in any way.

What I meant about future QE is that I think the Fed would rather face the next significant financial adverse event with a balance sheet that is at $2T rather than $4.5T. Because it gives them more flexibility and tools in terms of how they respond - the Fed would have that $2.5T extra runway of QE available to them. There were concerns about two years ago when Fed rates were near zero and there was the possibility of deflation and people were concerned that the Fed couldn't become any more accomodating because they thought the Fed couldn't go below zero. (They could I think, but some people were worried.) The Fed doesn't want to be backed into a corner and lose the confidence of the investing world.

Hope that makes more sense.
 
And by extension, if Interest Rates are moving higher, it would seem to follow that Gold / Precious Metals would move lower. no ?
 
The fed is going to push us into another recession. The hard data has been surprising to the downside for 13 months straight. I guess they want to pop the bubbles or maybe its politically motivated.

Historically every two term president leaves his successor with a recession. So it shouldn't be a surprise.
 
FiveDriver said:
And by extension, if Interest Rates are moving higher, it would seem to follow that Gold / Precious Metals would move lower. no ?
Click to expand...
Not necessarily. Gold/precious metals are usually harbors if high inflation is anticipated.

If inflation drops, then maybe prices drop.

It's really hard predict though. Gold/precious metals sometimes behave contrary to expectations.
 
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