The US Federal Reserve has announced that it will begin the unwinding of its decade-long quantitative easing (QE) program in October 2017.
US Federal Reserve chair Janet Yellen has confirmed that the central bank will begin winding down its purchases of US Treasury and mortgage-backed securities in October.
The decision to begin reducing the Fed’s balance sheet came as no surprise to financial markets, given it has been widely telegraphed for several months.
Ms Yellen, who is keen to avoid a repeat of the 2013 ‘taper tantrum’, would have been pleased to see the minimal reaction in US financial markets to the news. The 10-year Treasury bond only increased by 2 basis points in reaction to the announcement.
The Fed's balance sheet reduction will start with asset sales of US$10 billion per month, and is expected to accelerate to US$50 per month over the next 12 months.
According to Perpetual’s Matthew Sherwood, if the assets sales go ahead as planned the Fed’s balance sheet will reduce from its current US$3.5 trillion to US$3 trillion in three years’ time.
“This would most likely have little market impact, especially as the world has stopped deleveraging and the global recovery is strengthening,” he said.
In its statement, the Fed said that only a “material deterioration in the economic outlook” could deter it from going ahead with its balance sheet reduction.