Fed: On hold – Nordea Markets

Nordea Markets analysts explain that the minutes of the March FOMC meeting showed a Fed that is on hold due to slower growth and higher risks, and also showed that the remaining decision on balance-sheet normalisation could come soon.

Key Quotes

“Several steps of balance sheet normalisation were announced at the March meeting and the minutes showed that this discussion took centre stage at the meeting. It seems that the decision to slow the balance sheet reductions already in May as well as to keep the overall size of the balance sheet unchanged for a while after the end of QT in September were quite close calls.”

“Minutes also hinted at a decision on the longer-run composition of the Fed’s bond holdings to be taken already at upcoming meetings. A decision to aim for a return to a normal duration of the Treasury portfolio in the longer run, and thereby increasing the risk of a reverse operation Twist, would put some upward pressure on the longer-end of the Treasury curve, in our view.”

“The average time to maturity on the current Treasury portfolio is around 8 years compared with around 4 year before the financial crisis. A decision to outright sell mortgages could lead to higher mortgage rates.”

“The financial markets discussions concluded that the Fed’s own communications of patience had been important in terms of the recent improvement in financial conditions. The flat yield curve was viewed as a concern, but of course followed by a sentence about why this time might be different.”