| Dr. Gil Befman, Chief Economist of Bank Leumi
A statement from the Federal Reserve’s Open Market Committee on Wednesday indicates that economic activity and employment in the U.S. have continued to strengthen. And in the US has dropped significantly.
The expression of the state of imbalance between supply and demand, associated with the plague and the reopening of the economy, continued to contribute to high levels of. The financial conditions are favorable, against the background of policy measures to support the economy and credit to households and businesses in the United States.
The FOMC aims to achieve full employment and 2% inflation in the longer term. With inflation rising well above 2%, a strong labor market and rising inflation expectations as well, the commission predicts that soon there will be a suitable time to raise the. The market is pricing a first interest rate hike of 25 basis points in the upcoming decision, of 16/3/2022.
The committee decided to continue to reduce the monthly rate of its net asset purchases, and bring them to an end in early March. As of February, the commission will increase its holdings in government bonds by at least $ 20 billion a month and in mortgage-backed securities (MBS) by at least $ 10 billion a month.
FOMC has clarified its approach on the subject of the plan for a significant reduction in the balance sheet size of the Federal Reserve. First, it was clarified that the Committee considers changes in the Fed interest rate to be its main means of adjusting monetary policy. At the same time, the committee announced that it would determine the timing and pace of reducing the size of the Fed’s balance sheet in a way that supports the achievement of employment targets and price stability. The committee expects that the reduction in the size of the Fed’s balance sheet will begin after the process of raising the Fed’s interest rate begins (March according to the markets).
In terms of the asset holdings reduction plan, the committee is aiming for a process that will be conducted over time in a declared and predictable manner, primarily by reducing the amounts to be reinvested in the securities held in the Fed’s open market account. That is, it is a largely passive move, in which government bonds and other assets that reach maturity will not be reinvested.
To illustrate, the Fed’s balance sheet contains more than $ 1.1 trillion in US government bonds that will mature over the coming year, out of a total balance sheet of close to $ 9 trillion. The Fed can allow this redemption to be made in part or in full, without reinvesting the redemption money in bonds or other assets.
This is not a plan to actively sell US government bonds, so it is a “relatively delicate” plan for the relevant markets. The Committee intends to hold securities in the amounts necessary for the effective and effective implementation of monetary policy.
Alongside government bonds, the Fed has additional assets such as MBS. In the longer term, the commission intends to hold primarily U.S. government bonds and not other assets. In other words, the Fed is interested in resetting its holdings in MBS over time (about 2.7). $ 1 trillion) and other non-government assets.
The immediate reaction in the markets to the Fed announcement was an increase in the yield to maturity of U.S. government bonds, with an emphasis on medium- and long-term. At the same time, there have been relatively slight price declines in the MBS market.
The market embodies four increases of 25 basis points each during 2022, to a level of about 1.1% at the end of 2022, compared to about 0.1% today. Overall, there were no surprises in the policy announcement, and the stock market rose after the publication of the policy announcement.
The writer is the chief economist of Bank Leumi. The data, information, opinions and forecasts in the review are provided as a service to readers, and do not necessarily reflect the official position of the Bank. They should not be construed as a recommendation or substitute for the reader’s independent discretion, or an offer or invitation to receive offers, or advice for the purchase and / or execution of any investments and / or actions or transactions. Errors may occur in the information and changes may occur. The Bank and / or its subsidiaries and / or companies related to it and / or the controlling shareholders and / or stakeholders in which of them may from time to time have an interest in the information presented in the review, including financial assets presented in it.