The run-off is on.

Janet Yellen, attribution  Federal Reserve

Janet Yellen, attribution Federal Reserve

September 20, 2017 was a big day for the US Federal Reserve.

By now you will have noted that the Fed has finally signalled the beginning of quantitative tightening (QT).

While choosing to leave interest rates at bay for the moment, FOMC signalled the start (effective in October) of its much anticipated balance sheet normalisation.

Specifically, FOMC authorised and directed the Open Market Desk to:

  • undertake open market operations in order to maintain the federal funds rate at 1%-1.25% (i.e., no interest rate rise for the moment);
  • commence balance sheet normalisation in October by rolling over in auction maturing treasury securities/agency debt and mortgage-backed securities; 
  • run-off reinvestment in those asset classes by reinvesting in securities in excess of adjustable redemption caps, namely $6 billion per month for treasuries/$4 billion per month for agency and mortgage-backed securities; and
  • step up those redemption caps (i.e., reinvest less, run-off more) by $6 billion/$4 billion every 3 months for a 12 month period (which seems to mean 4 step-ups for each class) until a target level of $50 billion per month in aggregate redemptions (split $30 billion/$20 billion) is reached.

This plan had been signalled some years ago (although it includes a few tweaks) but judging by US equity markets some 5 days thereafter, its timing had not been fully factored in. 

No 'end date' or run-off aggregate has been stipulated, however based on the plan it will take a couple of years to run-off the first ~$1 trillion. 

We are told the program will be updated to reflect future decisions of the Board of Governors and FOMC.

FOMC also announced on the 20th that its Board unanimously voted to maintain interest paid on required and excess reserve balances at 1.25% (no change), and to maintain the primary credit rate at 1.75% (no change).

How the Fed will approach interest rate policy in the face of balance sheet normalisation is yet to be laid out in a more fulsome QT program/policy. I suspect this might remain fluid and flexible for some time yet.

Not a hawk just yet, but a solid step in the right direction for the Fed - and food for thought for the BoE and ECB.


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