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14 Apr 2015
Second dimension to Fed’s exit strategy? – Rabobank
FXStreet (Barcelona) - The Rabobank Team argues that while the market is focused on the US rate hikes, the Fed might have another exit strategy which might determine the amount of tightening.
Key Quotes
“While markets are mainly concerned with the timing of a first rate hike and the shape of the hiking cycle, there is a second dimension of the Fed’s exit strategy that determines the amount of monetary policy tightening.”
“Following three quantitative easing programmes, the central bank currently holds a substantial portfolio of US Treasuries. The size of this portfolio is held constant by reinvesting the proceeds of maturing bonds.”
“However, since the Fed also wants to reduce the amount of monetary stimulus caused by this portfolio, it will start tapering its reinvestments sometime after the hiking cycle has started.”
“If we only look at the stock effects of the Fed’s portfolio, the rate impact will be fully determined by the reduction of the size of the Fed’s balance sheet.”
“However, we may also see flow effects caused by the Fed’s demand for treasuries. Since the latter depend on the pattern of redemptions of the Fed’s portfolio, we take an in-depth look at its composition and the implications for the Fed’s reinvestment demand. This requires looking beyond the current composition of the Fed’s portfolio.”
Key Quotes
“While markets are mainly concerned with the timing of a first rate hike and the shape of the hiking cycle, there is a second dimension of the Fed’s exit strategy that determines the amount of monetary policy tightening.”
“Following three quantitative easing programmes, the central bank currently holds a substantial portfolio of US Treasuries. The size of this portfolio is held constant by reinvesting the proceeds of maturing bonds.”
“However, since the Fed also wants to reduce the amount of monetary stimulus caused by this portfolio, it will start tapering its reinvestments sometime after the hiking cycle has started.”
“If we only look at the stock effects of the Fed’s portfolio, the rate impact will be fully determined by the reduction of the size of the Fed’s balance sheet.”
“However, we may also see flow effects caused by the Fed’s demand for treasuries. Since the latter depend on the pattern of redemptions of the Fed’s portfolio, we take an in-depth look at its composition and the implications for the Fed’s reinvestment demand. This requires looking beyond the current composition of the Fed’s portfolio.”