NY Fed sees balance sheet normalisation to be complete by the end of 2021

The Federal Reserve Bank of New York projects that the Fed’s balance sheet will begin winding down in mid-2018, phasing out re-investment of the principal of the assets it holds until it ceases altogether in mid-2019 and finally reaches a normalised size in the fourth quarter of 2021.

The projections, which are based on a December survey of market participants, appear as part of the NY Fed’s annual report on domestic open market operations in 2016 and pre-date the minutes of the last FOMC meeting released yesterday, which showed that most Fed policymakers expect to begin reducing the size of the central bank’s balance sheet later this year if the economy stays on its current path.

The report notes that while the rate of principal repayment on Treasury securities is predictable, the speed at which bonds backed by mortgages mature is dependent on the rate at which borrowers repay their mortgages and is harder to estimate.

“Under these assumptions, the size of the SOMA portfolio is projected to remain largely unchanged at its current level of approximately $4.2 trillion through mid-2018, while full reinvestments continue. After that date, it starts to decline as reinvestments are phased out and then ended altogether in mid-2019. The Federal Reserve’s securities holdings then decline until the portfolio reaches its normalized size in the fourth quarter of 2021 At that time, the domestic securities portfolio is estimated to be about $2.8 trillion, with a slightly higher concentration in Treasury securities than in agency MBS.”