Wall Street sees Fed balance sheet normalization plan by year end: Reuters poll

Fri Apr 7, 2017 6:50pm EDT
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By Richard Leong

NEW YORK (Reuters) - Wall Street's top banks see the Federal Reserve laying out by year end its plan to scale back reinvestments in Treasuries and mortgage-backed securities in order to begin shrinking its $4.5 trillion balance sheet, a Reuters poll showed on Friday.

Five of 15 primary dealers, or banks that do business directly with the U.S. central bank, expected the Fed to start paring reinvestments by year end, while the rest forecast the central bank would do so by the end of the second quarter of 2018.

The median view of 11 dealers was for the Fed to eventually shrink its balance sheet to $2.75 trillion.

As the U.S. central bank seems prepared to tackle unwinding its bond holdings, primary dealers see the Fed raising interest rates two more times by year end and three times in 2018.

Fed policymakers have turned their focus to paring the central bank's massive bond holdings, as shown in the minutes of their March policy meeting released on Wednesday.

Last month, the Fed raised rates by a quarter percentage point to 0.75 percent-1.00 percent amid signs of an improving U.S. economy and stock prices reaching record highs.

The central bank amassed its Treasuries and MBS during three rounds of large-scale purchases known as quantitative easing, which was aimed to lower long-term borrowing costs and combat the repercussions of a severe recession that was exacerbated by the global credit crisis more than eight years ago.

On Wednesday, the Fed held $2.46 trillion in Treasuries and $1.77 trillion in MBS.   Continued...

FILE PHOTO - A police officer keeps watch in front of the U.S. Federal Reserve building in Washington, DC, U.S. on October 12, 2016.     REUTERS/Kevin Lamarque//File Photo