Fed’s balance sheet could normalise between 2020 and 2023 - UOB

Analysts at UOB Group explained that the Federal Reserve Bank of New York released a report on Monday (10 Jul) that calculated the Fed’s balance sheet could normalise between 2020 and 2023. 

Key Quotes:

"The calculations are based on assumptions taken from New York Fed’s June survey of primary dealers, which include a hypothetical December 2017 announcement of balance-sheet normalisation, to begin in January 2018. From the report, “in the median scenario, $174 billion of Treasury securities are projected to be redeemed and $252 billion to be reinvested in 2018…From January 2019, when the runoff cap is fully phased in, until the time that the size of the portfolio normalises, we project a total of $262 billion of Treasury rollovers…In the median scenario, the staff’s prepayment model suggests that roughly $117 billion of agency debt and agency MBS are projected to pay down and $78 billion to be reinvested in 2018”.

"The NY Fed report further pointed that “under the three scenarios presented here, the portfolio normalises sometime between 2020 and 2023, depending on the long-run balance sheet size…In the median scenario, the portfolio "normalises in the fourth quarter of 2021…At that time, and the domestic securities portfolio is estimated to be about US$2.9 trillion”. The report also noted “The normalisation date is pulled forward to the first quarter of 2020 in the larger liabilities scenario, with a portfolio size of $3.5 trillion at that time. The date is pushed out to the third quarter of 2023 in the smaller liabilities scenario, with a portfolio size of $2.4 trillion”. UOB’s assumption is that the Fed’s balance sheet to be lowered to US$3.58trn by end-2019 and then to US$2.98trn by end- 2020. It will reach our (expected) terminal balance sheet size of US$2.53trn by 3Q-2021. Please see UOB’s report on US Fed Balance Sheet Normalization & Impact On ASEAN FX (dated 23 Jun 2017)."