Fed switching focus to balance sheet reduction - AmpGFX


The Fed has risen rates to a point where it is shifting focus to balance sheet reduction, explains Greg Gibbs, Analyst at Amplifying Global FX Capital. 

Key Quotes

“Yellen has argued that the aim is for balance sheet reduction to be conducted in the background, and the fed-funds rate will be the main policy instrument.  Nevertheless, balance sheet reduction is a form of removing policy accommodation, and it will tend to delay and slow rate hikes.  This is a point made by several FOMC members in the Fed minutes and very explicitly by Fed member Lael Brainard in a speech on Tuesday.”

“The minutes said:

“Several participants indicated that the reduction in policy accommodation arising from the commencement of balance sheet normalization was one basis for believing that, if economic conditions evolved broadly as anticipated, the target range for the federal funds rate would follow a less steep path than it otherwise would. However, some other participants suggested that they did not see the balance sheet normalization program as a factor likely to figure heavily in decisions about the target range for the federal funds rate. A few of these participants judged that the degree of additional policy firming that would result from the balance sheet normalization program was modest.”

“A “few participants” that supported the rate hike in June, “were less comfortable with the degree of additional policy tightening through the end of 2018 implied by the June SEP median federal funds rate projections.”  This suggests that they were biased towards delaying hikes as the QE wind-down proceeded.”

“Canada, of course, has no need for balance sheet reduction and is more focused on rates policy.  It is now in the mode of normalizing rates, and if the Fed hits pause on rates as its balance sheet reduction gets moving, the CAD may strengthen further.”

“The CAD has already risen significantly, and the market will be reluctant to keep buying for the time being, but the focus must turn to other countries that may also need to normalize policy via conventional rate hikes.  Australia and New Zealand are possible candidates.”

 

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.

Feed news

Latest Forex News

Editors’ Picks

EUR/USD hits two-month lows amid USD strength

EUR/USD has pared its gains that followed upbeat preliminary PMIs for Germany came out above expectations, pointing to a recovery. The USD is advancing amid fears of the coronavirus.

EUR/USD News

GBP/USD drops below 1.31 amid USD strength, fails to sustain PMI gains

GBP/USD is trading below  1.31 after hitting a fresh high of 1.3172. The UK Manufacturing PMI beat with 49.8 and Services PMI with 52.9. The USD is gaining ground across the board.

GBP/USD News

Cryptos: Bears take over and draw a bloody moon

Despite appearances, Bitcoin is the asset with the best risk/benefit ratio. The current falls are adjusted to the ranges of the previous rise. Downward momentum expires in the first half of February.

Read more

Gold rebounds above $1560

The XAU/USD pair dropped to a daily low of $1556.70 during the European trading hours as the easing worries over coronavirus becoming a global epidemic and a broad-based USD strength put the pair under bearish pressure.

Gold News

USD/JPY drops to two-week lows near 109.30

The USD/JPY pair reversed its direction during the American trading hours as the risk-off atmosphere allowed the JPY to find demand as a safe-haven.

USD/JPY News

Forex MAJORS

Cryptocurrencies

Signatures