By how much will the Fed need to regrow the balance sheet? – ABN AMRO
10.10.2019, 11:17

By how much will the Fed need to regrow the balance sheet? – ABN AMRO

Bill Diviney, the senior economist at ABN AMRO, expects the Fed to formally announce a decision on the balance sheet at the 29-30 October FOMC.

  • “The question is, by how much will the Fed need to regrow the balance sheet, and at what pace? Clues for this are provided by the continued repo operations that the NY Fed has conducted to address the liquidity shortage in the short term. While demand at these operations has fallen considerably, from a peak of $92bn in September to $30.8bn in today’s operation, the Fed will want to regrow the balance sheet at least by the maximum amount demanded at these operations, plus a buffer to be sure demand is sufficiently met.
  • We, therefore, expect an initial boost of c.$150-200bn – with purchases conducted over a few months – followed by organic growth of the balance sheet in line with nominal GDP growth (to meet growing cash demand – as occurred prior to the financial crisis), i.e. c.4% p.a. In the meantime, the Fed will likely want to continue its repo operations until it judges the balance sheet has reached a level sufficient to cover reserve demand.”


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