FOMC Preview: Look out for announcements regarding the balance sheet – ING

James Knightley, Senior Economist at ING, points out that the Federal Reserve will keep rates unchanged and stick to its “patient” approach. However, he warns, about an announcement regarding the balance sheet.  

Key Quotes:  

“After having expanded the Federal Reserve’s balance sheet to a peak of around $4.5trillion through quantitative easing, it is gradually being unwound through the proceeds of some maturing assets not being reinvested in the bond market. The balance sheet currently stands at just under $4trillion with the Fed signalling that it may bring this process of balance sheet reduction (or quantitative tightening) to an end as early as the end of this year. We could see this being formally announced on Wednesday and it would leave the Federal Reserve with a much larger balance sheet than was originally envisaged at the start of the process.”

“We think futures markets are being too pessimistic in pricing in the next Federal Reserve move being an interest rate cut.”

“Cross-currents’ have led the Federal Reserve to adopt a more ‘patient’, data dependent approach to monetary policy for 2019. While the market is pricing in an eventual cut as the next Fed move, we continue to look for one last 25 basis point hike in late summer as growth returns and trade tensions ease.”