Fed focus in 2019 to be balance sheet - Bloomberg

Markets currently have only half a rate hike priced in from the US Federal Reserve, but investors are signaling that the way forward wil be marked with added emphasis on the Fed's holdings as traders bring the Fed's bond holdings to the forefront.

Key quotes

“A more nuanced answer on the balance sheet might have mitigated market dynamics today,” Krishna Guha, head of central bank strategy at Evercore ISI in Washington, wrote in a note to clients. Interest-rate futures suggest that traders aren’t now even fully pricing in a single rate hike for 2019. If that continues to be the case, and financial markets remain turbulent, Powell and his colleagues would get little bang for their buck by simply taking another hike out of the dot-plot forecast for the policy rate, or otherwise talking down prospects of further tightening.

What might at some point prove more effective is consideration of adjusting the current pace of running off as much as $50 billion of the Fed’s bond portfolio each month.

“The balance-sheet discussion will take on additional prominence into 2019,” wrote Guha, who previously worked at the New York Fed. “With barely half a hike priced in for 2019 there is no longer a sizeable buffer in terms of expected Fed rate hikes that could be taken out if the outlook were to darken materially from here.”