The analysis team at HSBC expects the FOMC will raise the federal funds rate 25bp at both the June and September policy meetings this year, taking the range for the funds rate from 0.75-1.00% today up to 1.25-1.50% in September.
Key Quotes
“After that, we expect the FOMC to turn its attention to unwinding some of the quantitative easing (QE) put in place from 2009 through 2014. Reversing some portion of QE through the disinvestment of Treasury and MBS securities will be another form of tightening monetary policy. It will also substitute for further increases in the federal funds rate, at least for a while.”
“We assume that the FOMC will begin the contraction of its balance sheet in the first quarter of 2018. We estimate that the Fed’s balance sheet will likely be at least USD1.0 trillion larger in the future compared to its pre-crisis level. A “target” level for the balance sheet today could be approximately USD2.5 trillion. The Fed's actual securities portfolio currently totals around USD4.3 trillion.”
“A “full runoff” scenario would allow for a quick reduction in the balance sheet, but we believe this would be too abrupt and too erratic. Instead, the Fed could choose to set a constant monthly dollar amount for the disinvestment of both Treasury and MBS securities to create a more gradual and predictable reduction in its balance sheet that would likely be less disruptive from a market point of view.”
“For simplicity’s sake, we think the Fed will choose to disinvest Treasury securities and MBS at the same monthly rate. A “10&10” disinvestment policy, in which the Fed cuts its reinvestments in both Treasuries and MBS by USD10.0bn a month starting in the first quarter of 2018 and continuing until the fourth quarter of 2022, would take the balance sheet down to the estimated target level over five years.”
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