HOME > BUSINESS > US Fed unlikely to reverse quantitative easing this year: HDFC Securities

US Fed unlikely to reverse quantitative easing this year: HDFC Securities

US Federal Reserve Building

Broking and financial firm HDFC Securities Ltd said it does not expect the US Federal Reserve to start sucking out the liquidity that it has infused into the global financial market in the last nine years any time soon.

The comments came in the wake of the release of the minutes of the Federal Open Market Committee meeting that indicated that the Fed would begin selling some of the bonds its purchased under ‘quantitative easing’ policy later this year. Read the relevant section of the minutes at the bottom of this article.

ARMAGEDDON?

The US Federal Reserve has pumped in around $4 trillion into the US financial ecosystem, starting in late 2008 and ending in late 2014.

From around 600 bln worth of treasury bills as of 2007, its holdings have zoomed to about 2.45 tln of treasury holdings, 1.77 trl of mortgage-backed securities and various other debt instruments such as banks notes totaling 4.5 tln todate.

As it bought these instruments, it released a lot of money into the global financial system. This money was instrumental in lifting the prices of various assets — such as stocks, real estate and even paintings, to unprecedented levels over the last nine years.

Now, when it takes the money back, the prices of all these assets will climb back down.

NOT HAPPENING SOON

However, HDFC Securities said the central bank is unlikely to go in for such a drastic option, especially since it has not made much headway on its previously announced interest hike plans.

“We believe that the Fed’s talk of a balance sheet contraction, even before all the planned hikes have gone through this year, is to bring the markets down to terrafirma, rather than any genuine desire to do so at this juncture,” said VK Sharma, Head of Private Client Group at HDFC Securities.

Sharma said if the Federal Reserve should probably not be talking about selling its bonds and reversing its quantitative easing at this time.

“We believe that the Fed has acted too prematurely,” Sharma said. “We say this because one, the Trump regime has not been able to come out with a viable health proposal. Two: Trump has still not thrown any further light on his promised tax breaks, and three, with so much of an uncertainty, where was the need to further muddle the waters by throwing in this spanner of balance sheet contraction?”

Sharma said the markets do not seem to believe that the Fed will indeed start selling its securities, going by bond prices. Prices of bonds should have fallen, and their yields increased, if the market really expected the central bank to carry through with its promise.

“But we see.. (that) the yield on the 10 year has fallen. The ten year bond closed with a yield of 2.334%, down 0.030 from 2.364%…So the conclusion that we draw is that though the Fed may have plans to contract its balance sheet, it may not do so in the near future.”

Relevant extracts of FOMC Minutes

In their discussion, policymakers reaffirmed the approach to balance sheet normalization articulated in the Committee’s Policy Normalization Principles and Plans announced in September 2014. In particular, participants agreed that reductions in the Federal Reserve’s securities holdings should be gradual and predictable, and accomplished primarily by phasing out reinvestments of principal received from those holdings. Most participants expressed the view that changes in the target range for the federal funds rate should be the primary means for adjusting the stance of monetary policy when the federal funds rate was above its effective lower bound. A number of participants indicated that the Committee should resume asset purchases only if substantially adverse economic circumstances warranted greater monetary policy accommodation than could be provided by lowering the federal funds rate to the effective lower bound…

Consistent with the Policy Normalization Principles and Plans, nearly all participants preferred that the timing of a change in reinvestment policy depend on an assessment of economic and financial conditions. Several participants indicated that the timing should be based on a quantitative threshold or trigger tied to the target range for the federal funds rate. Some other participants expressed the view that the timing should depend on a qualitative judgment about economic and financial conditions. Such a judgment would importantly encompass an assessment by the Committee of the risks to the outlook, including the degree of confidence that evolving circumstances would not soon require a reversal in the direction of policy. Taking these considerations into account, policymakers discussed the likely level of the federal funds rate when a change in the Committee’s reinvestment policy would be appropriate. Provided that the economy continued to perform about as expected, most participants anticipated that gradual increases in the federal funds rate would continue and judged that a change to the Committee’s reinvestment policy would likely be appropriate later this year. Many participants emphasized that reducing the size of the balance sheet should be conducted in a passive and predictable manner. Some participants expressed the view that it might be appropriate for the Committee to restart reinvestments if the economy encountered significant adverse shocks that required a reduction in the target range for the federal funds rate.

When the time comes to implement a change to reinvestment policy, participants generally preferred to phase out or cease reinvestments of both Treasury securities and agency MBS (mortgage-backed securities)… An approach that phased out reinvestments was seen as reducing the risks of triggering financial market volatility or of potentially sending misleading signals about the Committee’s policy intentions while only modestly slowing reductions in the Committee’s securities holdings. An approach that ended reinvestments all at once, however, was generally viewed as easier to communicate while allowing for somewhat swifter normalization of the size of the balance sheet. To promote rapid normalization of the size and composition of the balance sheet, one participant preferred to set a minimum pace for reductions in MBS holdings and, if and when necessary, to sell MBS to maintain such a pace.

Nearly all participants agreed that the Committee’s intentions regarding reinvestment policy should be communicated to the public well in advance of an actual change. It was noted that the Committee would continue its deliberations on reinvestment policy during upcoming meetings and would release additional information as it becomes available.

Follow ULTRA.news
Worth Rs 70,000 cr, Patanjali’s Acharya Balkrishna named to India’s richest Acharya Balkrishna of Patanjali | WikipediaAcharya Balkrishna of Patanjali has emerged as the latest addition to the list of the top ten richest people in India, which is still headed by Mukesh Ambani, chairman of Reliance Industries.Haridwar-based Acharya Balkrishna, ag...
Bajaj Finance offers 8.1% interest on FD to seniors, 7.85% to others Bajaj Finance said it will offer 8.10% on fixed deposits to senior citizens, making it among the highest interest rates offered on fixed deposits in the country. For others, it will be 7.85% per year.The non-banking finance company claims to have the highest credit ranking ...
BSNL to form tower co, but will it sell stake? The Union Cabinet today gave its approval for hiving off mobile tower assets of Bharat Sanchar Nigam Limited into a separate company owned by BSNL.While the move, is not of that big a significance in itself, it is crucial from the perspective of what could come next.It is...
Tata Steel UK wins regultory approval for separating pension liabilities Tata Steel UK, formerly Corus Group, has taken one more step towards solving its financial woes by moving its pension-related liabilities to a new entity.It said the UK Pensions Regulator has approved a Regulated Apportionment Arrangement or RAA that separates the pension sc...
Infosys included in Dow Jones Sustainability Index Infosys said it has been inducted into the Dow Jones Sustainability Indices (DJSI) and is now part of two of the indices -- DJSI World and DJSI Emerging Markets.The indices measure the economic, environmental and social performance of companies and are based on the companie...
Wipro announces details of its Rs 11,000 cr share buyback Wipro has announced details of its buy back of up to 343.8 mln shares or about 7.06% of its total equity base at a price of Rs 320 each for up to Rs 11,000 cr.The Buyback Size is 23.15% of the fully paid-up Equity Share capital and free reserves as per the audited standalone ...
SBI, Canara Bank lead in opening unorganized sector pension accounts State Bank of India has opened the largest number of accounts under India's universal pension scheme for the unorganized sector, the government said today.State Bank of India has opened 51,000 out of the total 3.07 lakh pension accounts opened by banks under the scheme, whic...
Moody’s downgrades IDBI Bank over lower govt support Moody's Investors Service has downgraded debt issued by IDBI Bank over concerns on "reduction in the amount of extraordinary government support incorporated into the bank's ratings and its weak standalone credit profile," the bank said.While earlier, Moody's used to assume t...
Oriental Bank of Commerce to raise Rs 500 cr via bonds State-owned Oriental Bank of Commerce said it intends to raise Rs 500 cr by selling bonds."The Bank intends to raise Tier 1 Capital through Private Placement of Basel III Compliant Additional Tier 1 Bonds of Rs.10,00,000 each at par aggregating to Rs.500 crore with an option ...
Minda Corp raises Rs 25 cr via commercial paper Auto ancillary company Minda Corp said it had raised Rs 25 cr by issuing commercial paper.Commercial paper refers to unsecured, short-term promissory notes or debt issued by a company.These paper usually mature in a few weeks or months and are used for working capital an...
GMR closes funding for Mopa Airport, Axis Bank underwrites debt GMR Goa International Airports Limited said it closed funding for the upcoming Mopa Airport in Goa, with Axis Bank underwriting the entire debt of Rs 1,330 cr."Having tied up funding for the project, we are working towards starting on ground construction activity post monsoon...
Mahindra Finance to raise Rs 2,000 cr via debentures Non-banking financial services company Mahindra & Mahindra Financial Services said it plans to raise Rs 2,000 cr by issuing debt instruments to the public.The non-convertible debenture issue will open on July 10.The NCDs carry a rating of IND AAA from India Ratings and BW...
RCom says telcos facing cash flow issues due to ‘go slow’ approach by banks Telecom operator Reliance Communications said companies in the sector are facing cash flow issues due to what it called a 'go slow' approach taken by banks in disbursing loans.In an update on its 'standstill agreement' with its lenders, which provides it a window of seven mon...
HPCL appoints bankers for Rs 6,000 cr FCCB issue Hindustan Petroleum Corp Ltd said it had appointed banking intermediaries for organizing investor meetings in the run up to raising Rs 6,000 cr ($930 mln) by selling foreign-currency denominated bonds.The bonds will be non-convertible, and will be issued if the meetings disco...
Are ‘truly free’ demat and trading accounts here in India with Finvasia? Finvasia, a technology-driven online broking start-up, announced that it has rolled out what it claimed was India's first 'truly' free online demat account for investing in stocks and derivatives, including futures.There have been many 'free demat account' providers in the p...
SBI cuts interest rates on bigger home loans State Bank of India, the largest Home Loan Provider in India has reduced interest rates of high value home loans.Home Loans above Rs. 75 lakhs will now be cheaper by one-tenth of a percentage from 15 June, 2017.The revised interest rates will be 8.55% p.a. for salari...
RCom ‘respectfully disagrees’ with Fitch and Moody’s on its credit rating Anil Ambani-led Reliance Communications said it disagrees with the decision of agencies Moody's and Fitch to downgrade the company's credit rating based on its 'standstill agreement' with its lenders.Shares of RCom fell 4% to Rs 19.30 on the National Stock Exchange today ...
RCom formally assures lenders it will pay Rs 25,000 cr in four months Anil Ambani Group's telecom arm Reliance Communications said it has 'formally' communicated to its lenders that it will pay an amount of Rs 25,000 cr to them on or before Sept 30.The latest statement from the telecom operator comes as a way of reassuring investors and lenders...
RCom says looking to refinance various payments till September Anil Ambani Group's Reliance Communications said it was in talks with its lenders and partners to put off some of the instalment payments that the company had to pay until the completion of its merger with Sistema Shyam Teleservices and Aircel Cellular by September this year....
Fitch Ratings upgrades Tata Motors on improving business performance JLR contributes most of the company's profitsFitch Ratings has upgraded its rating on Tata Motors by one notch, pointing to the automaker's improving business performance."The upgrade reflects the sustained improvement in TML's Indian automotive business over the last tw...
Glaucus questions stock price of Hong Kong-listed Fullshare Holdings Ltd Glaucus Research Group, a California-based short seller, said it was selling Hong Kong-listed developer Fullshare Holdings due to peculiar trading patterns seen in the stock's counter."Fullshare is supposedly a commercial and residential property developer, but this business ...
Rs 1.7 lakh cr deposited via demonetization may not be withdrawn – SBI Monthly cash withdrawals for all banks | source:SBI ResearchThe Indian banking system is likely to get a permanent liquidity boost of Rs 1.7 lakh cr due to the demonetization of high-denomination bank notes, State Bank of India chief economic adviser said in a note to bank c...
PNB, Corp Bank most aggressive in going after big debtors; SBI, BoB more relaxed Punjab National Bank, the third largest public sector bank in India, and smaller cousin Corporation Bank can teach bigger siblings like State Bank of India and Bank of Baroda a thing or two about going after big loan defaulters, an analysis of Reserve Bank of India data shows. ...
Yes Bank denies billion dollar QIP rumors Yes Bank, one of India's youngest, and fastest-growing banks, said it had no plans to go for a billion-dollar qualified institutional placement of its shares as reported by the media.The bank had tried to do a mega share sale in September last year, but the effort didn't find...
Administrative charges on employee provident fund cut to 0.65% from 0.85% After keeping the move on hold for three months due to the elections, the Employees' Provident Fund Organization has cut its administrative charges on the funds it manages to 0.65% from 0.85%, according to labor ministry sources.The cut in administrative charges -- which was ...