Fed: AN END OF NORMALISATION IN SIGHT
The Federal Reserve made an extensive use of the different tools in its expanded monetary policy toolkit, causing the balance sheet to balloon to more than $4,600bn. In the past two years, the central bank has set about shrinking the balance sheet to have some room for manoeuvre in the event of an economic slowdown. This normalisation is constrained, however, by the excess reserve requirements of banks as well as market perception. Although the Effective Fed Funds Rate (EFFR) has risen to the same level as the Interest Rate On Excess Reserves (IOER) , with both scotched at 2.40%, the increase in the proportion of TBills in HQLA ratios masks, to some extent, the impact of this drain in reserves on money markets. In their communication, several FOMC members have intimated that this normalisation could be over by the end of the year, with announcements as early as the March FOMC meeting . We therefore expect a reduction to $1.1trn as early as October, with a direct transition to full reinvestments.
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