Fed To End Unwind In 2019?

The Fed’s Minutes from its January meeting were released on February 20th. The biggest media headline from the Minutes was that the Fed plans to end the unwind of the balance sheet sometime in 2019. In fact, the number of times this statement was repeated surprised us. Based on the Fed statement, we still don’t know the pace of the QT unwind. Whether it will end in 2019 or 2020 or 2021 is still an uncertainty. Here’s why.

Specifically, the Fed Minutes stated:

“Almost all participants thought that it would be desirable to announce before too long a plan to stop reducing the Federal Reserve’s asset holdings later this year. Such an announcement would provide more certainty about the process for completing the normalization of the size of the Federal Reserve’s balance sheet.”

The Fed is now working on the details of conveying the pace of the unwind. Expect those to come out within the next few months.

As the chart on the left shows, there is about $4 trillion in assets on the Fed’s balance sheet.

If the Fed unwinds the balance sheet at a speed of $50 billion per month for the rest of 2019, it would end QT at about $3.5 trillion. Earlier projections were for the balance sheet unwind to end in 2020 or 2021 with a value between $2.5 trillion and $3 trillion.

The chart on the right (above) shows domestic investors have offset the Fed’s and foreigners’ declines in holding share of U.S. Treasuries. Clearly, there isn’t a problem with demand for treasuries because interest rates have fallen recently. The Fed’s balance sheet policy is only one aspect affecting the treasury market, so you can’t make a linear assumption of where rates will be after this new policy is enacted.

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