Should the FED be more aggressive in reducing its balance sheet?
As far as I know, no one expects the Federal Reserve to raise rates at the meeting this week.
A rate hike would be a complete stunner. Instead, the big news on monetary policy this week is very likely to be the Federal Reserve announcing it will begin gradually trimming its balance sheet at the start of October. Unwinding Quantitative Easing (QE) will take time .
The Fed has said that it’s going to trim the balance sheet by $10 billion a month for the first three months, $20 billion per month for the next three, and on and on until it hits a pace of $50 billion per month. So, if it starts cutting in October it would take until about 2021 for the balance sheet to reach what we believe is a normalized level .
Some people think the Fed could get away with being much more aggressive about reducing the balance sheet. But I don’t think so: inflation expectations are so low that FED doesn’t need to reduce balance sheets so aggressively…If the FED would act very aggressively , a “time bomb” of trillions of dollars of corporate bonds issued in the last years would explode on a probable sell-off , after a strong steepening of the Treasury curve .
The Fed is right to be cautious by nature. If the FED were more aggressive about trimming the balance sheet , suddenly the stock market and credit market had one of its inevitable corrections. A " one- side" market would be the inevitable conclusion : only sellers, no buyers, with liquidity evaporating everywere for weeks ( if not months ) .
Generally speaking , it is extremely important now that central banks around the world remain extremely accommodative. We have entered in a “slow growth- no inflation “ environment . So, please, don't call for a "tightenig mode" which could be very dangerous for the global economy .
Let the central banks be aggressive when inflation will become aggressive, not before. Or they will cause a recession . Up to now, none of them are remotely close to running a “tight” monetary policy.