Investing.com – Although markets appeared surprised on Wednesday to find that the Federal Reserve (Fed) had already decided to normalize its $4.5 trillion balance sheet “later this year”, experts felt the move was logical ahead of what will be a changing of the guard at the U.S. central bank.
“I think it does make some sense to get started before the leadership transition at the Fed," Goldman Sachs chief economist Jan Hatzius said.
"There will likely be a new Fed chair after early 2018, when Janet Yellen's term comes to an end and having already established a bit of a baseline path for how the balance sheet is going to be adjusted probably makes sense at that point to reduce the uncertainty that you otherwise get in that period," he explained in an interview with CNBC.
Economists from Barclays share a similar opinion given their expectations for a turnover in the members of the Federal Open Market Committee (FOMC).
They expect Fed chair Janet Yellen and Vice chairman Stanley Fischer to resign when their terms end in early and mid-2018 and believe that Fed governor Lael Brainard will announce her resignation around the same time. With the departure of Fed governor Daniel Tarullo and the two unfilled vacancies, these experts predict that only Fed governor Powell will remain on the board after mid-2018.
“We believe the committee may desire to lay out its plans for the balance sheet and start the process of balance sheet reductions before the current leadership leaves, thereby handing over a complete set of interest rate and balance sheet policies to the incoming leadership on the FOMC, similar to the transition between chairman Bernanke and chair Yellen during the tapering of asset purchases,” these economists said in a note to clients.
“Unless renominated, chair Yellen will leave her seat in February 2018 having defined her legacy as the first central bank leader to have successfully lifted off of the zero lower-bound and to have begun the process of post-financial crisis normalization,” added Morgan Stanley in a note to clients.
“If all goes well, it will be a gift to her successor,” these experts said, adding that they expect two more rate hikes in June and September before the balance sheet normalization is announced in December.
Markets are currently pricing in the odds for the next rate hike in June at around 58%, according to Investing.com’s Fed Rate Monitor Tool.
However, Fed fund futures put the chance of a second move in September at around only 32%.
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