When Will The US Federal Reserve Raise Interest Rate Boots In March?

When will the Federal Reserve begin to shrink? What kind of rhythm will be used to reduce the scale? How to balance the scale with the increase of interest rates? This series of problems has become a sword of Damour and Chris hanging over the global capital market. After the Federal Reserve raised its interest rate boots in March, the discussion on shrinking the list became more and more popular.

Yellen, chairman of the Federal Reserve, said in a speech after raising interest rates in March that he had not yet made decisions on reducing the balance sheet and would gradually reduce the scale in a predictable manner. But many Fed officials, including Kashkari, chairman of the US Federal Reserve of Minneapolis, have publicly stated that it should not drag on too long.

At present, the Federal Reserve reinvests treasury bonds, institutional bonds and the principal repayment of MBS. As of March 15th, the Federal Reserve's balance sheet had reached $4 trillion and 500 billion.

In a recent report, Goldman Sachs pointed out that the Fed has two alternative paths on the table:

Path 1: take the two pronged approach and adopt a parallel way of raising interest rates and shrinking tables to start shrinking the scale at the end of this year.

Path two: rely solely on Increase interest To tighten monetary policy and throw it to the new leadership in 2018. Goldman Sachs said that the benefits of path selection, as Yellen emphasized earlier, are more familiar with the interest rate instruments and facilitate policy communication. In addition, the goal of raising the federal funds rate will leave room for future policy easing. The advantage of path two is that it can adjust inflation to target level faster than interest rate increase and help prevent asset price bubbles.

Goldman Sachs makes a hypothetical analysis of the two possible paths the Fed may take.

Under this plan, Goldman Sachs assumed that the Federal Reserve began in December 2017, in the next 10 months, gradually reduced the maturity of treasury bonds to reinvest, but did not sell stock bonds. Goldman Sachs assumed that the Federal Reserve would reduce its reinvestment to 90% in January 2018 and gradually decrease it to October 2018.

In this case, Goldman Sachs expects Federal Reserve This year will raise interest rates three times, and increase interest rates four times in 2018 and 2019.

Goldman Sachs said that according to past experience, shrinking the scale may lead to a more than expected deflation effect. Under the mild path, Goldman Sachs expects that the impact of shrinking the list on financial markets and economic activities is equivalent to two additional interest rates.

Path two: late start, radical scale reduction

In this case, Goldman Sachs assumed that the Federal Reserve would postpone its contraction until next year, completely halting reinvestment in July 2018, and did not adopt a transitional approach, and sold 40 billion dollars a month. Stock bond 。 In the second half of 2018, the balance sheet will be reduced by about US $250 billion per quarter.

In this way, by 2019, the balance sheet reduction will be more than $500 billion, which means that interest rates will be raised by 8 basis points less than the path one.

But Goldman Sachs predicts that under the aggressive path, the impact of shrinking the scale on financial markets and economic activity is equivalent to four additional interest rates.

Goldman Sachs believes that the Federal Reserve is more inclined to adopt a path one way, in December 2017 officially announced scale reduction plan, in order to reduce the uncertainty caused to the market interference. If the Fed postpones the contraction to next year, then the uncertainty of the Fed's change will have a significant impact on the market.

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