Fed Intensifies Balance-Sheet Discussions With Market PlayersBy and
Talks aimed at gauging market impact of balance-sheet moves
Consultations widened to include investment managers
Federal Reserve staff, widening their outreach to investors in anticipation of a critical turning point in monetary policy, are seeking bond fund manager feedback on how the central bank should tailor and communicate its exit from record holdings of Treasuries and mortgage-backed securities.
Fed officials are intent on shrinking their crisis-era $4.48 trillion balance sheet in a way that isn’t disruptive and doesn’t usurp the federal funds rate as the main policy tool.
To do that, they need to find the right communication and assess market expectations on the size of shrinkage, which is why conversations with fund managers have picked up recently.
“All indications suggest that conversations around the balance sheet have accelerated,” said Carl Tannenbaum, chief economist at Northern Trust Company, a Chicago-based asset manager. “The consideration of everything from design of the program to communication seems to have intensified.”
Most U.S. central bankers agreed that they would begin phasing out their reinvestment of maturing Treasury and MBS securities in their portfolio “later this year,” according to minutes of the March meeting. They also agreed the strategy should be “gradual and predictable,” according to the minutes.
Fed staff routinely seek feedback from investors and bond dealers to get a fix on sentiment and expectations. The New York Fed confirmed the discussions and said it is part of regular market monitoring. The Fed is getting closer to disclosing its plan, and conversations have become more intense.
“They are gauging what’s the extent of weak hands in the market that will dump these assets,” said Ed Al-Hussainy, a senior analyst on the Columbia Threadneedle Investment’s global rates and currency team. “They are calling all the asset managers. It is not part of the regular survey.”
Fed Vice Chairman Stanley Fischer said in a April 17 speech at Columbia University in New York that central banks should try and avoid surprising markets to avoid breaks with its policy goals. “Information gathering is an important part of managing market expectations -- for the simple reason that you do not know if you are going to surprise the market unless you have a good estimate of what the market is expecting,” he said.
The New York Fed’s regular survey of market participants, which is due back Monday, also included several questions on the eventual balance-sheet exit, focusing on timing of the announcement to how many months it would take to shrink to a more appropriate level. The March and January surveys also had questions on the balance sheet.
An April 12 meeting of the New York Fed’s Investor Advisory Committee on Financial Markets -- a panel that includes Ray Dalio, the chairman of Bridgewater Associates LP, and Dawn Fitzpatrick, chief investment officer at Soros Fund Management -- included an agenda item on global central bank balance sheets. New York Fed President William Dudley, the vice chairman of the policy-setting Federal Open Market Committee, is chairman of the advisory panel.
The survey asked about expectations for the normalization of central bank balance sheets, both in the U.S. and abroad, the agenda item said. It also questioned what strategies they expect different central banks to use and the different challenges that may be faced.