FOMC statement this week to give a nod towards an announcement of balance sheet normalization in September

Analysts at Goldman Sachs expect the July FOMC statement this week to give a nod towards an announcement of balance sheet normalization in September.

Key Quotes

“We expect the July FOMC statement to hint at an announcement of balance sheet normalization in September.  Following the announcement of scheduled caps on runoff and recent Fed guidance about the terminal balance sheet size, we update our balance sheet projections.”

“Our baseline expectation is that runoff will continue until the balance sheet reaches a “large” terminal size in late 2021 of about 13.4% of GDP ($2.6tn today or $3.0tn in 2021).  Alternatively, a preference of future Fed leadership for a “small” balance sheet would imply a terminal size of 11% of GDP.”

“Under our balance sheet runoff projections, we estimate that the fading of portfolio balance effects should lift 10-year yields by roughly 20bp this year, 15bp next year, and 10bp per year from 2019-2021.”