Attention should shift to Fed’s balance sheet – UOB

In view of analysts at UOB Group, the reduction of the Fed’s balance sheet should prove to be key for the USD prospects.

Key Quotes

“The 14-15 March 2017 FOMC minutes and recent Fedspeak indicated that Fed Reserve policymakers are thinking about taking steps to reduce the Fed’s behemoth US$4.5trillion balance sheet, which could be announced as early as end-2017”.

“Reducing the Fed Reserve’s balance sheet will be a significant policy change because 1) the Fed’s reinvestment policy has been in place for nearly a decade (since Aug 2010), 2) the Fed has never done balance sheet reduction before, so this is uncharted territory, and 3) whether the FOMC can keep to its planned 3 rate hikes in 2018 if it starts to reduce the balance sheet”.

“Based on the key points from the Fed’s “Policy Normalization Principles and Plans”, it would seem that the Fed Reserve is expected to passively allow matured debt to roll off and slowly return to primarily holding UST on its balance sheet in the long run, but this is of course not set in stone, and the Fed may adjust its approach to policy normalization according to circumstances”.