Saturday, March 18, 2017

Goldman on Fed Balance Sheet Runoff

by Calculated Risk on 3/18/2017 07:04:00 PM

A few brief excerpts from a note today by Goldman Sachs economist Daan Struyven: Balance Sheet Runoff: Sooner, Slower, Safer

The debate within the FOMC about balance sheet normalization is now underway. Fed officials have two basic choices. They can rely exclusively on the funds rate for now and leave balance sheet decisions to the new leadership team in 2018, or they can combine ongoing funds rate hikes with a turn to balance sheet runoff later this year.
A ... practical case for early balance sheet normalization is based on the upcoming Fed leadership transition. If the new appointments—especially the new Chair—are thought to favor aggressive balance sheet normalization, perhaps even including asset sales ... financial markets might experience heightened uncertainty during the transition. ...

The current FOMC could reduce that uncertainty by establishing an early “baseline” path for very gradual balance sheet rundown. Committee decisions are subject to change, of course, but markets would probably take comfort from the fact that most FOMC members will remain in their positions and that it is harder for the new leadership to radically change a policy that is already in place than to devise a new one. We therefore expect the committee to announce gradual tapering of reinvestments in December 2017, while holding the funds rate unchanged at that meeting.
CR Note: This might depend on who is the next Fed Chair.  Fed Chair Janet Yellen's term expires in Feb 2018 and the smart choice would be to reappoint her to another term (Like Reagan reappointing Democrat Volcker in 1983, Clinton reappointing Republican Greenspan, and Obama reappointing Republican Bernanke).