MONETARY POLICIES by Rahul Khanna


FX


The Fed tightening is anything but watching the paint dry


The FOMC announced at the September meeting that it will start its balance sheet (BS) normalisation process from October. The Fed balance sheet stands at around $4.5 trillion that it


amassed during the financial


crisis that started in 2007-09 also called the Great Recession. Even though Fed started tapering in January 2014 and ended its monthly asset purchase program in October 2014, the Fed kept its BS steady at all-time highs by


reinventing maturing bonds (US treasury and mortgage SOMA holdings).


The Fed now wants to start unwinding their BS which will involve letting a specified amount from principal redemptions roll- off while reinvesting the rest of the amount coming from maturing bonds each month. The roll-off will start with small amount of around $10Bn a month rising each quarter until it hits $50bn


a month. The market expects the Fed to keep rolling the proceeds until BS is reduced to $2.5 trillion; this is likely to take four or more years.


The Fed BS normalisation plans have given investors some idea as to how the Fed will scale back its balance sheet once it starts. However, we still have no idea about how this will impact the financial markets over the coming months and years. One obvious impact of


FX TRADER MAGAZINE October - December 2017 53


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