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29 Jul 2014
Fed balance sheet will exceed pre-2008 levels on a permanent basis - Commerzbank
FXStreet (Córdoba) - Bernd Weidensteiner, analyst at Commerzbank, noted that even though the Fed is set to completely exit QE3 in October, the Fed balance sheet will continue to grow for a few more months. Moreover, the analyst thinks the balance sheet will stabilize at levels above the ones pre-crisis and thus the deposit rate will become a more relevant tool.
Key Quotes
“At its meeting Wednesday, the Fed is likely to decide another $10bn reduction in its asset purchase programme, to $25bn per month”.
“Since the start of QE3 in the autumn of 2012, the Fed has purchased assets totalling almost $1,540bn. The US central bank is likely to further reduce its purchases in September and exit QE3 completely in October. However, the asset portfolio will still grow thereafter because of the usual settlement delays of MBS purchases on the Fed's balance sheet and the Fed will initially replace maturing bonds with new ones”.
“Overall, the volume of QE3 could thus even slightly exceed the QE1 level of $1,600bn. QE1 was conducted between November 2008 and May 2010, i.e. – unlike QE3 – at the height of the crisis. At over $4.4trn, the Fed’s balance sheet total now stands at 26% of GDP, which compares to 6% before the start of the crisis”.
“Even with the Fed’s bond portfolio likely to shrink again in the next few years, there are many reasons to believe that the central bank’s balance sheet will exceed the levels reported before 2008 on a permanent basis. This will also change the requirements for the Fed’s toolbox. The deposit rate, in particular, looks set to become more relevant”.
Key Quotes
“At its meeting Wednesday, the Fed is likely to decide another $10bn reduction in its asset purchase programme, to $25bn per month”.
“Since the start of QE3 in the autumn of 2012, the Fed has purchased assets totalling almost $1,540bn. The US central bank is likely to further reduce its purchases in September and exit QE3 completely in October. However, the asset portfolio will still grow thereafter because of the usual settlement delays of MBS purchases on the Fed's balance sheet and the Fed will initially replace maturing bonds with new ones”.
“Overall, the volume of QE3 could thus even slightly exceed the QE1 level of $1,600bn. QE1 was conducted between November 2008 and May 2010, i.e. – unlike QE3 – at the height of the crisis. At over $4.4trn, the Fed’s balance sheet total now stands at 26% of GDP, which compares to 6% before the start of the crisis”.
“Even with the Fed’s bond portfolio likely to shrink again in the next few years, there are many reasons to believe that the central bank’s balance sheet will exceed the levels reported before 2008 on a permanent basis. This will also change the requirements for the Fed’s toolbox. The deposit rate, in particular, looks set to become more relevant”.