We'll have another 50 bps rate hike by the FED

Fed’s Asset Purchases to Ease Next Year?

Posted Friday, October 9, 2020 by
Arslan Butt • 1 min read

A recent survey by the New York Fed reveals that Wall Street primary dealers expect the US central bank to start easing its bond purchase program starting next year and phase it out by the end of 2023. This sentiment received support from Dallas Fed President Robert Kaplan as well, who felt that there was no need to increase asset purchases and expressed support to pare down these purchases once the coronavirus crisis eases.

While speaking to Bloomberg Radio, Kaplan remarked, “We are already buying a significant amount of bonds as it is, and I’d be skeptical of doing more myself. When the crisis starts to lapse and we’ve weathered it, I personally would be an advocate of withdrawing these programs, the 13-3 programs need to lapse, the bond-buying needs to curtail, the Fed balance sheet growth needs to curtail.”

Since the pandemic first struck in March, the Fed has bought around $3 trillion worth of Treasuries and mortgage-backed securities and has committed to buying at least $120 billion of them every month since June. Wall Street banks forecast that the central bank could reduce its purchase of MBS by H1 2021 and bring down total asset purchases to an average of $84 billion by H2 2021 and even further to around $25 billion by H2 2022.

The banks also expect the Fed to start hiking interest rates again only by H2 2024, even as Fed policymakers have maintained that rates are likely to remain at current levels at least until 2023. Last month, the central bank had tweaked its stretegy in order to support the economy by focusing its efforts towards helping boost employment levels.

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