The Federal Reserve has so far tightened monetary policy “solely” through increases to the federal funds rate. However, the minutes from the most recent policy meeting show “most participants think QE unwinding should start ‘later this year’,” NAB said.
“However, there is no agreement as to how this will be done nor what the end target, in terms of balance sheet size, should be.
“The minutes indicate that the ‘how’ will be announced well before any action, so we expect the process of unwinding QE to start in the December quarter 2017.”
NAB said the Federal Reserve is still likely to raise the federal funds rate twice this year, but it is “unlikely that it will both raise rates and announce QE unwinding at the same time”, meaning further rate hikes are most likely to occur at the June and September meetings.
“The major risks to a June hike are the weakness in the ‘hard’ activity measures – the Fed would want to see improvement before increasing rates – and the current fiscal uncertainty,” NAB said.
“However, since the March rate hike, while the stock market has declined slightly, 10-year bond yields have also fallen, as has the US dollar, and corporate credit spreads have remained stable. All this adds up to fairly benign financial conditions, leaving the door open for a June hike, assuming the economy remains on track.”
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