Date
15 December 2017
The US central bank will need to factor in tightening policies elsewhere in deciding the pace of shrinking its balance sheet. Photo: Bloomberg
The US central bank will need to factor in tightening policies elsewhere in deciding the pace of shrinking its balance sheet. Photo: Bloomberg

Global tightening to weigh on Fed balance sheet cut plan

Prospects for tighter monetary policy in Europe and other countries could pose a fresh problem for the US Federal Reserve as it meets this week to ponder a plan to shrink its balance sheet, Reuters reports.

The Fed bought US Treasuries and mortgage-backed securities for about six years in a program known as quantitative easing, taking its balance sheet to US$4.2 trillion as of end-March 2017.

The bond purchases after the 2008 financial crisis helped keep interest rates at record lows to spur borrowing and economic recovery.

But at its June meeting this year, as well as raising interest rates for the third time in six months, the Fed announced a plan to begin by letting US$6 billion a month in Treasuries mature without reinvestment and to increase that amount at three month intervals up to US$30 billion.

Similarly, the Fed said it will run down its agency debt and mortgage backed securities by US$4 billion a month until it reaches US$20 billion.

Now, the European Central Bank also appears likely to decide later this year on when to scale back its monthly bond purchases. 

Moreover, Canada’s central bank raised interest rates for the first time in seven years this month, and the Bank of England is expected to raise rates next year to combat rising inflation, Reuters noted.

The Fed led the way in tightening monetary policy as the global economy recovered from the 2008 recession but must now determine how plans by other central banks’ plans may affect its own policy.

While a stronger European economy has been welcomed by the Fed, a move by major central banks to all tighten monetary policy simultaneously has not been seen for a decade.

A move by the ECB to stop printing money could prompt the Fed to slow its plans for fear that financial conditions would tighten too fast, the report said.

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