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Fed will announce that balance sheet reduction will start in Oct - HSBC

In the view of analysts at HSBC, the FOMC Committee is expected to announce the start of the balance sheet contraction at its two-day monetary policy meeting concluding on Wednesday.

Key Quotes:

“We expect the FOMC to announce the commencement of balance sheet contraction 

For several months now, the FOMC has been preparing financial markets for the advent of quantitative tightening.

Fed officials have not used that term; they prefer "policy normalization" to describe the planned process of reducing the size of the Fed's balance sheet. But just as the expansion of the Fed's balance sheet through quantitative easing provided some monetary policy accommodation to the economy, shrinking the Fed's balance sheet should be regarded as a step in the direction of tighter monetary conditions.

Fed officials have thoroughly prepared financial markets for this event; we anticipate little market reaction 

In June, the FOMC announced that it intended to start reducing the size of the Fed's balance sheet sometime "this year," by gradually decreasing its reinvestment of principal payments received from its holdings of Treasury securities and agency MBS.

We expect the FOMC will announce that balance sheet reduction will start in October.

The latest Summary of Economic Projections, including projections for future rate hikes, may attract more attention 

We expect that the median projection for 2017 will still be for one more 25bp rate hike in December

The median projection is for an additional three 25bp rate hikes in 2018 and again in 2019”

Author

Dhwani Mehta

Dhwani Mehta

FXStreet

Residing in Mumbai (India), Dhwani is a Senior Analyst and Manager of the Asian session at FXStreet. She has over 10 years of experience in analyzing and covering the global financial markets, with specialization in Forex and commodities markets.

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