Fed balance sheet, economic outlook under the microscope

WASHINGTON (Reuters) – The US Federal Reserve is expected to keep interest rates at a steady level, reduce the number of hikes planned for the rest of the year, and unveil the long-awaited details of a year. plan to end the monthly reduction of his huge sheet balance.

Since the beginning of the year, the US central bank has announced a "patient" approach to rising borrowing costs, ending a three-year cycle of gradual monetary tightening, marked by nine rate hikes, including seven during the period 2017-2018.

Investors are now counting on a 75% probability that the Fed will no longer increase its overnight rate or federal funds, according to the FedWatch tool of the CME group. The federal funds rate is currently set in a range of 2.25% to 2.50%.

New quarterly economic and rate forecasts to be published with the latest Fed statement at 2 pm EDT (18:00 GMT) will show how much policy makers align with this view. The Fed's December forecast forecast two rises this year, but it is generally expected to be reduced to a single increase at the end of the two-day monetary policy meeting on Wednesday.

There should be a downward movement on the part of seven policymakers to reduce to zero the median number of increases expected for the year, a complete change of half a percentage point which has occurred only once since the Fed started publishing its "graphic projections" in 2012.

Investors' attention to the balance sheet may be more intense, and the Fed intends to stop reducing its holdings of Treasury bonds and mortgage-backed securities by up to $ 50 billion each month.

The details of this plan should also be released Wednesday, giving investors an idea of ​​the extension of the draw and what will likely remain in the Fed's badet portfolio once it has been shut down.

The minutes of the Fed meeting held in late January showed that officials wanted to "announce too early a plan to stop … reducing badets later this year," said a statement that many have interpreted as an end of the game for the balance sheet. the week.

Fed Chairman Jerome Powell will hold a press conference half an hour after the release of the policy statement.

STABLE REDUCTION

Fed officials have generally pointed out that the decay was coming to an end earlier than expected, so there may be only a few months left before the central bank reached a level that would allow it to stop.

"Assuming that the contraction process stops in October … the balance sheet should be in the region of $ 3.75 billion," wrote Roberto Perli, Cornerstone Macro badyst in an overview of the meeting of the Fed this week.

This is more than triple the size of the Fed's holdings before entering three rounds of quantitative easing in which it has purchased billions of dollars in treasury bills and mortgage-backed securities in response to the crisis economy and the 2007-2009 recession.

Having built its balance sheet during the crisis and its aftermath, the Fed began to "normalize" its holdings in October 2017 with a steady reduction of up to $ 50 billion a month.

After studying the reaction of the financial markets to the cuts and the use of reserves held by the Fed's financial institutions, the central bank concluded that the most effective way to manage interest rates was to maintain the supply. "And pay interest on any surplus held at the Fed beyond the legal minimums required, for example, to respond to customer withdrawal requests.

While banks are demanding more and more reserves for various uses, combined with growth in the amount of cash on hand and other items, the Fed believes that its size is close to that of its balance sheet.

The final composition of the privileged badets and how to achieve it are still debated.