Fed: The voyage home - Rabobank

Philip Marey, Senior US Strategist at Rabobank, suggests that the Fed’s balance sheet remains on autopilot as under the balance sheet normalization program only principal payments that exceed gradually rising caps are reinvested.

Key Quotes

“The cap started at $10bn per month and will increase in steps of $10bn at 3-month intervals until it reaches $50bn per month. Note that the initial $10bn cap and following $10bn steps are composed of $6bn for US treasuries and $4bn for agency MBS and agency debt. Once the caps reach their respective maximums of $30bn/month for treasuries and $20bn/month for agency debt and MBS – which is 12 months after the start of the normalization program –, they will remain in place until the FOMC judges that the Fed is holding no more securities than necessary to implement monetary policy efficiently and effectively.” 

“For the December meeting this means that the FOMC is expected to raise the reinvestment caps to $20bn from $10bn, in line with its balance sheet normalization program. Since the Fed follows a preset schedule for tapering its reinvestments, no inferences should be made regarding rate policy. Only in case of a recession, the Fed may decide to deviate from its course on the balance sheet.”