U.S. raises rate, bond holdings to fall this year

15 June 2017

The U.S. Fed’s Open Market Committee (FOMC) was expected to raise the federal funds rate range at its June meeting. It was also anticipated to have something to say about its holdings of Treasury bonds and asset-backed securities. It delivered on both items.

The U. S Fed announced it has raised its target range for the federal funds rate to 1.00%-1.25%. It would also begin to reduce re-investment of proceeds of matured bonds this year. “The Committee currently expects to begin implementing a balance sheet normalization program (sic) this year, provided that the economy evolves broadly as anticipated.”

While the exact timing has been left unstated, the amounts have been disclosed as starting at USD$6 billion (AUD$7.9 billion) Treasury bonds per month and USD$4 billion (AUD$5.3 billion) mortgage securities per month. Every 3 months the amounts will increase until they hit USD$30 billion and USD$20 billion respectively. To put his into perspective, the U.S Fed’s last quantitative easing programme, referred to as “QE3”, bought an additional USD$45 billion mortgage securities per month. Westpac estimate the run-down in holdings will take place over at least four years.

May CPI figures released earlier in the day had shocked the bond market and yields had plunged. After the FOMC statement, yields recovered somewhat but by the end of the day bond yields were still lower. U.S 2 year yields were 4bps lower at 1.33% and 10 year bond yields were 9bps lower at 2.13%.

Westpac’s Richard Franulovich said, “The Fed’s confidence on the inflation outlook leaves markets hyper sensitive to inflation data in coming weeks and months; inflation expectations in the Michigan survey and the PCE deflators [are] obvious data points to watch.”