Fed: Normalisation far slower than accumulation

The Fed’s plans to normalise their balance sheet are benign and shouldn’t upend markets, according to analysts at Westpac.

Key Quotes

“Fed’s plans for Treasury holding run off since the maturity schedule is well known, while the Fed’s holdings of Agency and MBS are subject to an unknown and volatile maturity schedule.”

“On the Treasury side, the Fed plans to phase out reinvestment of maturities starting at a $6bn pace per month, growing in increments of $6bn per quarter until a $30bn cap is reached.”

“The maturity profile of the Fed’s Treasury holdings materially exceeds the cap through 2018. That implies the Fed’s holdings of Treasury securities will fall at the same pace of the cap in 2018. Implying a $180bn rundown in the Fed’s holdings of Treasury securities in 2018.”

“Beyond that however there are just a handful of months when maturities exceed the cap. Over 2019 and 2020 for example there are just seven such months. In these months, Fed balance sheet run-off will match the size of cap: $30bn at this stage.”

“In all other months maturities of the Fed’s Treasury holdings are markedly below the $30bn cap, implying that the phasing out of reinvestments can only match volume of maturities. In some months maturities run below $10bn per month.”

“Altogether, the Fed’s $30bn cap implies a maximum $360bn in Treasury holding run off ($30bn x 12mths) in 2019, but with known maturities in many months of that year well below the cap the actual rundown in the Fed’s holdings of Treasuries will be a smaller $249bn in 2019 and an even smaller $167bn in 2020.”

“The pace at which the Fed’s holdings of Treasuries is run down is glacial compared with its growth through multiple rounds of asset purchases in 2009-2014.”

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