Markets Have Year to Wait Before Balance-Sheet Hit: Evercore ISI

  • Aggregate global central bank balance sheet key for markets
  • Fed, ECB, BoJ have bulked up balance sheets to $14 trillion

Yellen Says Fed Will Shrink Balance Sheet Slowly

For all the recent angst over a policy shift by key central banks, financial markets may have a year to go before an unprecedented unwinding of quantitative easing has an impact, according to Evercore ISI.

That’s when the cumulative balance sheet of the Federal Reserve, European Central Bank and Bank of Japan -- now almost $14 trillion -- probably will start to shrink, Krishna Guha, vice chairman of Evercore ISI in Washington, wrote in a note. The report followed comments by Fed Governor Lael Brainard Tuesday that she was comfortable starting balance-sheet contraction "soon."

While the Fed’s wind-down is imminent, the European Central Bank and Bank of Japan are still proceeding with asset purchases. Evercore ISI’s assumption matches the emerging consensus view that the ECB will start tapering in January, with a phasing out of quantitative easing during 2018. The BOJ, which has already pared back its purchases, is seen trimming them further next year -- suggesting that the combined balance sheet starts falling in about a year.

"The peak in the aggregate global central bank balance sheet ‎is likely to prove more consequential for markets than the start of Fed roll-off alone -- and we forecast this lies only slightly over a year out," Guha wrote.

There continues to be debate over what that impact may be. JPMorgan Chase & Co. Chairman Jamie Dimon said in Paris Tuesday that once balance-sheet wind-down reaches some degree of magnitude, "it could be a little more disruptive than people think."

Guha highlighted that another risk stems from the current line from the ECB and Fed on the shift to balance-sheet normalization appears unlinked to economic data shifts -- a "somewhat" troubling approach.

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