Fed Trial Balloon: JPM Warns Fed May Start Shrinking Balance Sheet In September

Tyler Durden's picture

It appears the Fed's balance sheet "trial balloons" using primary dealers as intermediaries have begun.

After yesterday's unexpectedly explicit guidance on the future of the Fed's balance sheet, which prompted Goldman, Citi, and various other banks to suggest they may bring forward their estimates for when the Fed will announce the start of "renormalization", moments ago JPM's Michael Feroli, traditionally the analysts "closest" to the Fed, did just that when he issued a report stating that that there is now "chance of a September start" to renormalization, with the values for monthly roll-off caps and phase-in period to be "revealed at the June FOMC meeting."

According to Feroli, JPM continues to look for normalization to commence at the December FOMC meeting but "there is some chance of a September start, though this would not have a material difference for our projections on a multi-year horizon. At the meeting at which normalization starts we expect the Committee to announce a set of monthly roll-off caps for the following year, which increase regularly every three months.

"Our best guess is that the initial caps are $4 billion a month for MBS and $8 billion a month for US Treasuries. In the preannounced schedule, these caps would be augmented each quarter by $4 billion and $8 billion, respectively, until at the end of the year they are $16 billion and $32 billion. Consistent with yesterday’s minutes, even after the normalization process is fully phased in the monthly caps will still be in place, though in most months after the full phase-in they would cease to bind."

And here are the finer details which the Fed may or may not have leaked to select banks, in an attempt to prepare for what is coming, and talking down the equity bubble:

The Committee has yet to communicate values for the monthly caps or the length of the phase-in period. Presumably they will do this in the minutes to the June FOMC meeting. It is less clear that the Committee will have decided on a monetary policy implementation framework by the time roll-off begins (i.e. the current ratesetting system vs reverting to the pre-2008 system) and hence whether they will have decided on an ultimate amount of excess reserves available when the balance sheet is fully normalized. We have assumed a $500 billion target for excess reserves in our projections below. The other key assumption on the liability side of the Fed’s balance sheet is currency growth, which we have penciled in at 4% per year.

Under these assumptions the balance sheet is fully normalized in late 2021 at a level close to $3.0 trillion, down from about $4.5 trillion now. After normalization the Fed would turn to become a net buyer of  Treasuries, at a pace of around $400 billion per year, partly to meet growing demand for currency and partly to replace MBS which will continue to roll off the balance sheet. During the normalization process we see the funds rate as the tool of first resort for adjusting policy to both economic strength and weakness, unless the funds rate returns to the effective lower bound around zero, at which point roll-offs would stop. This latter eventuality is a risk for normalization being completed later than we anticipate.

Mechanistic questions about the impact of this a Quantitative Tightening on asset prices aside (it will be very bearish as the market will realize soon), we remind reader what former Fed governor Kevin Warsh said about the Fed's normalization "policy" several weeks ago.

I am confused by the Fed’s ‘normalization’ strategy in monetary policy. Its preferred sequencing of rate increases and balance sheet reductions differ markedly from what was agreed when we conceived QE in the ’war room’ amid the crisis. There might be good reason. But, the transmission mechanisms of rate changes and balance sheet adjustments are markedly different than projected. So too are the distributional effects. This merits a more robust public explanation.

Alas, a public explanation will not be provided.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
mily's picture

Sell all the things!

remain calm's picture


BullyBearish's picture

but it eeeez the leeeeequiditeeeee...........

Nice Try Lao Che's picture

Right now, it's an idiot DEAD HEAT between "Russians MAY have hacked the election" & "The Fed MAY shrink its balance sheet (you know, that thing that NOBODY can even audit)"

Life of Illusion's picture



No reduction in assets here


This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

spastic_colon's picture

yes exactly..........like GS and JPM aren't working together on the obsfuscation of the fed report

yogibear's picture

This is a joke, right?

Consuelo's picture



Except the Mummies - keep the F'ing MUMMIES...!!!

Arnold's picture

I'll take MBS for a trillion, Alex.

101 years and counting's picture

omg. the horrors.  the fed might stop "reinvesting" its maturing treasuries into new treasuries.  POMO never stopped.  it just goes under the radar.

P Rankmug's picture

"There is no firewall between excess reserves and currency in circulation or reserves that back new loans.  Excess reserves become currency in circulation or back loans when demanded.  This is the real danger for future runaway inflation until the Fed normalizes."


SeuMadruga's picture

Couldn't the fed just raise overnight the reserve requirements for on-demand deposits as well as institute reserve requirements for other time-deposits, to new ratios high enough to bridle further inflationary credit expansion, keeping them at current levels ?

Arnold's picture

Very Good.
But I just tapped my HELOC to go to the Frye Festival, and that was all she wrote for my equity in my home.

Businesses borrowing to pay dividends and stock buybacks, instead of cutting it out of profits.

Mortgage Backed Securities from the last crisis have not been resolved, but are used to collateralize more securities.

It's not a banking problem much as a way we are forced to do business problem.

Debt is the way to do business.
Cut that throat, and it's Halal.

markar's picture

Shrink their balance sheet thats worth maybe 20cents on the dollar, marked to market? To who?

UnschooledAustrianEconomist's picture

Privates Draghi and Koruda at your command, Ma'am!

GestaltNine's picture

It's amazing that the Federal Reserve exists when it fails to achieve any of its stated goals, is unconstitutional, and has enshrined a permanent decay in every aspect of our government and economy

headfake's picture

still bullish though right?

Quinvarius's picture

Because suddenly there is a market for fraudulent housing derivative paper?  The only way that garbage is coming off their books is a write off.  And the only way they are reducing Treasury debt is via the exact same method, as they buy more.

lester1's picture

Who in their right mind is going to buy their toxic assets ??

Silver Savior's picture

Some tweaker dressed in a suit and tie.

hotrod's picture

BOJ, EU, Ireland, RCB, England  just to name a few.  Plenty in the world seem to want our Treasurys as we add Trillions to the deficit every year.  It will be some miracle of finance that Trillions of toxic assets are suddenly desirable and the FED is liquid again.  They must know they can do it since it is being broadcast.

UpTo11's picture

"Normalized" pre '08 balance sheet is under $1T with virtually ZERO MBS.  

So lets just call it the "New Normalized".  Real normal would be a 5-7% 30YR yield.


Stormtrooper's picture

Does this mean that by December I can expect to receive 10% interest on my bank savings account?

Silver Savior's picture

Why would you save in fiat currency? Silver and gold are way better.

1stepcloser's picture

Get your worthless MBS here.....worthless MBS here

GlassHouse101's picture

A snake eating it's own tail. 

Silver Savior's picture

The fed can not shrink it's balance sheet. The economy is hanging on by a thread. Need more Qe at once. The economy has gone to shit outside of big cities.

Last of the Middle Class's picture

Yeah, and i MAY weke up with a 14 inch penis in the morning. The odds are about the same I'd say.

SeuMadruga's picture

Well, if balance shit reduction really happens, that dildo'll be shoved up in our asses !

shizzledizzle's picture

Yea, the clueless looking garden gnome is gonna unwind. 

WarPony's picture

Pay no attention to the clueless garden gnome behind the curtain, bitches.

Consuelo's picture



While the Fed fusses about, blipping over there on the radar screen --- I wonder how that $trade balance is doing...

Consuelo's picture



Does anyone here remember being taken down to the local bank as a kid, to open a passbook savings account - as a 'character building', rite-of-passage exercise...?


Like I said, humiliating...   

Bobportlandor's picture

I can not believe you wrote this. Just last night falling asleep out of the blue I thought the same thing.

My next thought was my parents bought their first home in 1955 with a 20 yr loan at 4.5-5% and today we sit at 3.6 20yr.





slimycorporatedickhead's picture


khakuda's picture

In other words, in the most optimistic case for the economy, they are leaving the majority of QE in place forever.  In a bad scenario, QE will start again.

So, Bernanke WAS lying when he said they weren't monetizing the debt.  So shocked!