Fed: QT set to begin in October but no balance sheet level target yet – Danske Bank

Analysts at Danske Bank suggests that in the latest FOMC meet, on the balance sheet, most was in line with expectations: This means that caps for Treasuries will begin at USD6bn per month and increase by USD6bn at three-month intervals until it reaches USD30bn per month and the caps for mortgage-backed securities will be set at USD4bn per month initially and increase USD4bn at three-month intervals until it reaches USD20bn per month.

Key Quotes

“Given the outlined cap-structure, Fed will still be a fairly active buyer of Treasuries likely reinvesting around USD200bn in Treasuries during 2018 (versus USD216bn last year and USD176bn projected this year).”

“However, we were a bit surprised that the Fed did not announce how much it wants to lower its balance sheet (or alternatively, for how long it wants to continue QT). It seems like the Fed wants to keep flexibility to adjust along the way if necessary, perhaps because the Fed is still concerned about a repetition of something like the taper tantrum in 2013. We still think that it is not a trivial question how much the Fed can lower the balance sheet due to increasing regulation, something the Fed has also touched upon previously. In the addendum from June, however, it is mentioned that the level of the quantity of reserve balances was also mentioned as it ‘will reflect the banking system's demand for reserve balances and the Committee's decisions about how to implement monetary policy most efficiently and effectively in the future. The Committee expects to learn more about the underlying demand for reserves during the process of balance sheet normalization’.”