FOMC: QE exit moves to the fore - HSBC

The FOMC announced plans for a more rapid and a larger reduction in its balance sheet than HSBC had anticipated and analysts at HSBC see balance sheet reduction starting in Q4 and next 25bp rate hike in December (vs previous September forecast).

Key Quotes

“Relatively soon

The FOMC indicated that it will tighten monetary policy further this year by unwinding some of the quantitative easing (QE) that it put in place during the financial crisis and its aftermath. Somewhat unexpectedly, the Committee spelled out in detail how the disinvestment of securities from the Fed’s portfolio will proceed. The stronger commitment to shrinking the balance sheet expressed today suggests to us that a formal announcement of the policy change will be made in September for commencement in October. Fed Chair Janet Yellen mentioned that “if the economy evolves as expected,” then balance sheet disinvestment could commence “relatively soon.” We do not believe that the FOMC will want to tighten policy in September with two tools simultaneously. For that reason, we now expect that the next rate hike will be postponed until December.”

“Rates view: The Fed’s 25bp rate hike and “dot” plot shifts were in line with market expectations, so there was only a moderate reaction. Current bond yield levels are already consistent with a dovish view for future Fed tightening moves.”

“FX view: The June FOMC is unlikely to materially alter USD fortunes in the near term. However, the path laid out for balance sheet reduction reinforces our conviction that the USD is destined to weaken in the coming months.”

“US credit strategy view: The FOMC’s actions leave intact the generally supportive conditions for the corporate credit market that have driven its strong year-to-date spread and return performances.”