The Federal Reserve Is Expected To Normalize Its Balance Sheet This Year.

The Federal Reserve announced that the federal funds rate target range will be raised by 25 basis points to 1-1.25% level, which is the second time the Federal Reserve raised interest rates this year, which is in line with market expectations.

The Federal Reserve issued a statement after the end of the monetary policy meeting that day, saying that since May, the US employment market has continued to be strong, and the US economy has been growing moderately.

but

The recent decline has been lower than the 2% target of the Fed.

The quarterly economic forecast released by the Fed on the same day shows that the US economy is expected to grow by 2.2% this year, up from 2.1% in March. By the end of this year, the US unemployment rate is expected to be 4.3%, lower than the 4.5% predicted in March. By the end of this year, the US inflation rate is expected to be 1.6%, lower than the 1.9% predicted in March.

The Fed expects the federal funds interest rate to rise to 1.4% by the end of this year, consistent with the March forecast.

This means that after the current rate hike, the Fed may also raise interest rates this year.

The Fed said that if the US economy generally meets the Federal Reserve's expectations, the Fed expects to normalize its balance sheet this year and gradually reduce its reinvestment in the maturity securities of the Federal Reserve.

(shrinking table).

At present, the Federal Reserve has been reinvesting the principal of maturity securities to maintain the scale of its balance sheet.

According to the details of the Fed's reduced balance sheet plan announced on the same day,

The planned cap on the maturity of the US Treasury bonds will no longer be reinvested per month, initially set at $6 billion, and then increase the ceiling by 6 billion dollars every 3 months until the final rise to $30 billion.

At the same time, the US Federal Reserve plans to hold the cap of the maturity debt and mortgage backed securities principal, which is no longer reinvested every month, initially set at $4 billion, and then raise the ceiling by 4 billion dollars every 3 months until the final rise to 20 billion dollars.

Since only the principal part of the maturity securities of the upper limit can be reinvested, with the gradual increase of the upper limit, the size of the securities that the Federal Reserve will reinvest each month will gradually decrease, and the balance sheet of the Federal Reserve will also be gradually reduced.

At present, the size of the Federal Reserve's balance sheet is about US $4 trillion and 500 billion, including US $2 trillion and 500 billion and US $1 trillion and 800 billion mortgage backed securities.

Yellen, chairman of the Federal Reserve, said at the press conference that the shrinking process would be gradual and predictable.

In fact, if the Fed gradually shrinks, there will be little negative impact on the economy and the market in the short term.

But it also raises questions about whether the Federal Reserve is losing its effectiveness in the market.

That is, the influence of the Fed's policy on the market is gradually decreasing. Although the United States is in an environment of rising interest rates, the US stock market is still at the peak of history. The enthusiasm of the market has not changed since the Fed raised interest rates.

Federal Reserve Chairman Yellen said at a press conference on the same day, the Fed announced the details of the "shrinking schedule" plan to prepare the market ahead of schedule, and the market will not be surprised when the Fed starts to "shrink".

But she did not reveal the specific time that the Fed began to "shrink the table".

The Federal Reserve's first interest rate increase since the start of the 2008 financial crisis in December 2015 has begun to slow the normalization of monetary policy.

Since then, the Federal Reserve raised interest rates again in December 2016 and March this year.

How the Fed will "shrink its watch" and its impact on the US economy and the global economy will be widely concerned by the market.

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