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Home / Business / Fed's balance sheet, economic outlook under microscope

Fed's balance sheet, economic outlook under microscope



WASHINGTON (Reuters) – The US Federal Reserve on Wednesday is expected to keep interest rates stable, shaving the number of trips projected for the rest of the year, and releasing long-awaited details of a plan to end the monthly reduction of its massive balance.

Federal Reserve Board Building on Constitution Avenue is depicted in Washington, USA, March 19, 2019. REUTERS / Leah Millis

The US central bank since early this year has signaled a "patient" approach to raising borrowing costs, drawing a end of a gradual three-year cycle of monetary tightening characterized by nine interest rate increases, including seven in the 2017-2018 period.

Investors are now putting a 75 percent probability on the likelihood that the Fed will not increase its benchmark rate, or federal fund prices, any more this year, according to the CME Group's FedWatch tool. The math fund price is currently set at a range of 2.25 per cent to 2.50 per cent.

New quarterly financial and forecast forecasts released with the latest Fed policy statement at. 14.00 EDT (1800 GMT) will show how close politicians adapt to that view. The Fed's December projection required two trips this year, but is expected to be cut to a single increase at the end of the two-day political meeting on Wednesday.

It would take a downward movement of seven policemen to bring the median expected number of trips to zero for the year, a full half percentage point that has only happened once since the Fed began making its "dot plot" of public forecasts in 2012. [19659004] The more intense investor focus may be in the balance, and Fed's plans to stop reducing government bond holdings and mortgage-backed securities each month by as much as $ 50 billion.

Details of this plan are also expected to be released on Wednesday, giving investors a sense of how much longer the countdown will continue, and what will likely remain in the Fed's portfolio of assets when it stops.

Minutes of the Fed's Political Meeting at the end of January showed that officials wanted to "announce too long a plan to stop reducing … asset holdings later this year," a statement many have understood to mean a playoff for the balance would be revealed this week.

Fed Mayor Jerome Powell is due to hold a press conference half an hour after the release of the policy statement.

STEADY REDUCTION

Fed officials have generally pointed out that the downturn ends rather than later, with perhaps only a few months to go before the central bank hits a level where it is comfortable to stop.

"Assuming the shrinkage process stops in October, the balance should end up in the $ 3.75 trillion region," wrote Cornerstone Macro analyst Roberto Perli in a preview of this week's Fed meeting.

It has more than tripled the size of Fed's holdings before three rounds of quantitative easing began, buying billions of dollars on government bonds and mortgage-backed securities in response to the economic crisis and recession for 2007-2009.

Having accumulated its balance during the crisis and its demand, the Fed began to "normalize" its holdings in October 2017 with a steady reduction of up to $ 50 billion per month.

Having studied the reaction of the financial markets on the reductions, as well as the use of reserves held by the financial institutions at the Fed, the central bank concluded with the most effective way of managing the interest rate in the future was to keep the reserves 'abundant' and pay interest on any excess as held at the Fed beyond the statutory minimum required, for example, to meet customer withdrawal requirements.

With banks now requiring more reserves for a number of applications, coupled with growth in the amount of money in circulation and other items, the Fed feels it is close to an appropriate size for the balance.

The preferred final mix of assets and how to reach them is still being discussed.

Reporting by Howard Schneider; Editing by Paul Simao

Our Standards: Thomson Reuters Trust Principles.

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