Fed: Balance sheet talk to inject a steepening bias in the US yield curve - ING

The view that the Fed will begin its balance sheet normalisation policy in Sept will likely be supported by the July statement noting that the process could start “relatively soon”, according to Viraj Patel, Research Analyst at ING.

Key Quotes

“This has been the message from Fed officials, with even the more conservative members such as Lael Brainard championing this idea. While the Fed will refrain from actually committing to a start date, we do see plenty of reasons to start the balance sheet run-off process sooner rather than later – not least the fact that financial conditions are evidently becoming unresponsive to adjustments in the short-term policy rate. For global markets, we are shifting to the idea that a rise in long-term yields driven by a pick-up in the term premium may be the lesser of two evils; risky assets stand a better chance of withstanding such a bond market adjustment, rather than one due to a sharp re-pricing of policy rate expectations. While the $ may use the Fed meeting to recoup some its losses, a goldilocks global market backdrop looks set in stone over summer.”