Fed starts portfolio drawndown in October

The U.S. Federal Reserve (FED) decided to keep the policy interest rate on hold at 1.25% on Wednesday last week, and announced to start winding down the $4.5 trillion balance sheet in early October.

Sept 20 witnessed the Federal Open Market Committee (FOMC)’s meeting end with mixed outcomes. Fed Chair Janet Yellen endorsed a wait-and-see approach on U.S. interest rates but adopted a hawkish rhetoric that the Fed would start to scale back its $4.5 trillion in holdings of mortgage-backed securities and U.S. Treasury bonds purchased from 2008 to 2014 by the beginning of the four-quarter. Yellen also added that she expected one more interest rate hike by the end of 2017 despite low inflation recently.

“What we need to figure out is whether the factors that have lowered inflation are likely to prove persistent,” she asserted. If they do, “it would require an alteration of monetary policy.” - Yellen said.

“The Fed took another step on its path of beautiful normalization, announcing that the gradual balance sheet reduction will start next month and limit revisions to both projections and policy guidance.” - said Mohamed El-Erian, Chief Economic Adviser At Allianz

Mikhail Fyodorov, an analyst of Abiliti Kapital, judged that Fed’s action would begin a piecemeal reversal of the three rounds of quantitative easing as the Fed has held an issue of $3.5 trillion dollars which was used to buy assets from American banks in six years after the 2008 financial crisis, making the financial system flooded in cash resources that caused a rapid growth: most indices of the US and Europe surged nearly threefold along with the cost of loans to companies and governments dropping to new record lows.

The reinvestment limit is arranged to advance by $10 billion each quarter to a maximum of $50 billion per month until Fed’s balance sheet decreases around $1 trillion or more within next five years.

“The Fed is opening a Pandora's box, and the consequences of the money-destruction policy could not be anticipated at the moment.” - said Richard Clarida, strategic adviser of Pacific Investment Management (PIMCO).

Right after the Fed meeting’s outcomes, U.S. bond yields climbed well, helping boost the Greenback. However, U.S. benchmark stock indexes inconsiderably moved. U.S. 10-year Treasury was up around 2.29 percent, the highest level since Aug 8, pushing bank stock prices higher also.
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