The Fed is Set to Stop Shrinking Balance Sheet

The Fed is Set to Stop Shrinking Balance Sheet

FLASH: The Fed could announce plans to stop shrinking its bond stockpile as early as next week and as late as June.

The FOMC meets on 19-20 March and is expected to again signal its intention to be patient before deciding whether to hike interest rates again. The Fed has been reducing the size of a bond portfolio it built up to stimulate the economy in the aftermath of the financial crisis.

The Fed’s assets surged to more than $4.5-T, but holdings now stand just under $4-Tbecause the central bank stopped reinvesting some proceeds.

Pimco says that suspects Fed officials will announce that they are beginning to reinvest all the proceeds of their Treasury and mortgage-backed securities back into Treasuries and let reserves very slowly decline as currency in circulation grows.

“This will give them roughly a year before reserves shrink to levels that will contribute to higher volatility in the effective fed funds rate,” it said.

This year, Fed officials will be considering whether to move to a balance sheet composed exclusively of Treasuries and whether to actively cut the length of those investments.

“This also gives them time to set up and test a new repo facility, which they plan to use to act as a stronger ceiling on money market rates, and smooth out unintended money market volatility,” referring to how the Fed controls short-term borrowing costs.

Pimco expects the facility to be operational in Q-4 of Y 2019 or following Quarter.

Pimco also is forecasting the Fed’s balance sheet will decline to around $3.8-T, and for reserves to fall to $1.5-T

Have a terrific weekend

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Paul Ebeling

Paul A. Ebeling, polymath, excels in diverse fields of knowledge. Pattern Recognition Analyst in Equities, Commodities and Foreign Exchange and author of “The Red Roadmaster’s Technical Report” on the US Major Market Indices™, a highly regarded, weekly financial market letter, he is also a philosopher, issuing insights on a wide range of subjects to a following of over 250,000 cohorts. An international audience of opinion makers, business leaders, and global organizations recognizes Ebeling as an expert.

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