The Fed’s been saying it’s going to let its bond portfolio wind down and raise interest rates four times in 2018. Yet this article argues that’s not the case. It says the Fed isn’t going to reduce its balance sheet much more and probably is almost done raising interest rates.
“We believe the Fed took this action since it has become increasingly concerned with the tightening in money markets over recent months and the pace by which its target fed funds effective rate is moving toward IOER,” Mark Cabana, rates strategist at Bank of America Merrill Lynch, said in a recent note to clients.
“While much of the money market tightening is due to U.S. fiscal policy (higher deficits and [Treasury] cash balance) we believe nascent signs of reserve scarcity are contributing to the move,” he added.
Cabana sees the balance sheet reduction concluding “toward the end of 2019 or in early 2020 at the latest, with risks for an earlier-than-expected end to the unwind depending on the Fed’s choice of monetary policy framework.”