Fed May Stop MBS Reinvestments, Leave USTs Alone: Morgan Stanley
(Bloomberg) -- FOMC is expected to cease reinvestments of maturing agency MBS starting in January, leaving UST side of portfolio untouched, Morgan Stanley economist Ellen Zentner writes in note, saying her view is “out-of-consensus.”
- Such a move would get FOMC back to primarily all-Treasuries portfolio, and would be easy to communicate and execute
- Size of balance sheet would be ~$2.9t, assuming a 3.5% long-run potential GDP growth rate and that Fed’s assets gradually drop to ~10% of nominal GDP by 2029
- Fed is expected to make formal announcement in December statement
- Central bank faces number of communication hurdles this year
- Market participants may take more frequent communication in speeches and Fed minutes about the balance sheet as meaning a more timely start to a drawdown
- Lack of details about which assumptions are embedded in Fed’s dots is another problem
- Balance sheet drawdown is expected by market to substitute to some extent for current expected path of rate hikes, rather than complement that path
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HALISTER1Source: BFW (Bloomberg First Word)
People Ellen Zentner (Morgan Stanley)
Topics To Be Announced Securities
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