According to James Bullard, the President of St. Louis Federal Reserve, the US Federal Reserve may wind down its gargantuan balance sheet in the latter half of 2017. If this is done, it will make it much less compulsory to up official funds rate. It is to be mentioned that opinions vary among Fed members on ending its reinvestment policy which dominates its balance sheet. It can be assumed that consensus will be reached only later in 2017. It will begin later this year.
No assets sell
Bullard clearly said that the Federal Reserve will not be selling assets from its massive $4.5 trillion worth balance sheet. Instead, it will not replace them as they get mature. If this is done, it will be adjusted positively by the markets. It will also put the limited upward pressure on the Treasury yields. Markets got spooked during the first week of April when the minutes of policy discussed during the meeting showed that policy makers are actively considering that assets should be shrunk in 2017.
William Dudley, the President of the New York Fed, said on April 7 that the Federal Reserve can start to strip bonds from its massive portfolio in 2017. These comments led to the temporary slide of the dollar. They also resulted in raised yields from longer dated bonds. A number of economists, polled by the Federal Reserve and Reuters had estimated that the process will begin in 2017.
Fewer hikes in interest rates
Bullard, who investors regard as a policy dove, said that he is in favor of only one extra interest hike in 2017. He had argued that terminating the bond reinvestment may function as a substitute for the rise in rates. The financial markets expect two rate hikes in 2017. A few members of the Federal Reserve favor three hikes if not more.
Bullard has noted and pointed out that the report of March payrolls was out on April 7. It was comparatively weak. It also fitted with his personal view that the inflation will not vary more than two percent in the coming months. When questioned about impact of American missile strikes in Syria, Bullard said that he did not view it as an important geopolitical event. Since it is not so, the Federal Reserve's monetary policy will not be affected. President Donald J. Trump, the 45th president of the United States had authorized the military strike on the Syrian air-base.