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US Fed - addressing the balance sheet...

Home / Perspectives / US Fed – addressing the balance sheet…

Neil Williams, Senior Economic Adviser
02 August 2017
Macro Economics
  • The US Fed is the first central bank to suggest it’s worrying about our addiction to QE. It’s about to become the test case for how to push both levers: gradual rate hikes & balance-sheet correction.
  • To quantify the impact on rates & gauge how policy should shift, we update our ‘Policy Looseness Analysis’. By including QE, QT, & fiscal considerations, our analysis beefs up the Fed’s Taylor Rule which recommends an unrealistically high & damaging peak rate.
  • By sustaining its proposed ‘non re-investment’ (QT) programme, the Fed could ‘take out’ as much as 130bp of further rate hikes by 2019. But, unless it’s accelerated, it would take till 2023 before the balance sheet is taken back to the $1trn considered ‘normal’.
  • Interest-rate normalisation will also be slow. Even a possible $1.1trn QT by 2019 leaves the de facto, QT-adjusted, real funds rate negative - on both our dovish & the FOMC’s hawkish rate views.
  • This gives credence to the ‘new normal’ view of low-for-longer global rates/yields, rather than a ‘normalisation’ in coming years to pre-crisis levels. Otherwise, the US’s eight-year expansion (its third longest) may not in summer 2019 become its longest ever...

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Neil Williams Senior Economic Adviser Neil joined Hermes in August 2009 and is responsible for Hermes’ economic research. He has a forward-looking approach to generate investment strategy ideas. Neil adopts top-down methods – macro and market analysis to identify interest rate and credit value, and sovereign default risk. Neil began his career in 1987 at the Confederation of British Industry (CBI), becoming its youngest ever Head of Economic Policy. He went on to hold a number of senior positions in investment banks - including Director of Bond Research at UBS, Head of Research at Sumitomo International, Global Head of Emerging Markets Research at PaineWebber International, and, before coming to Hermes, Head of Sovereign Research and Strategy at Mizuho International. Neil has 30 years’ industry experience and earned an MA in Economics in 1986 from Manchester University, having the previous year completed his BSc (Hons), also in Economics, from University College Swansea.
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