Fed’s Normalization Plan and Gold
Fed’s Normalization Plan and Gold by Arkadiusz Sieron – Sunshine Profits
On Wednesday, the Fed issued addendum to the Policy Normalization Principles and Plans. What does it mean for the gold market?
The FOMC not only hiked interest rates at its last meeting, but also laid out a. In the May edition of the , we wrote that the normalization process “will be passive, gradual and well communicated to the market. And the size of the balance sheet will not return to the pre-crisis level.” Indeed, the Committee “currently anticipates reducing the quantity of reserve balances, over time, to a level appreciably below that seen in recent years but larger than before the financial crisis.” Hence, investors should not expect a quick and abrupt decline in the Fed’s balance sheet.
The unwinding of the U.S. central bank’s balance sheet will be gradual, as the Fed will steadily decrease its reinvestment of the principal payments it receives from owned securities. These payments will be reinvested only to the extent that they exceed gradually rising caps, which are as follows:
- For Treasury securities, the cap would be set at $6 billion per month, increasing by $6 billion increments every three months over a 12-month period until it reached $30 billion per month.
- For agency debts and mortgage-backed securities, the cap would be set at $4 billion per month, increasing by $4 billion increments every three months over a 12-month period until it reached $20 billion per month.
The caps will remain in place once they reach their respective maximums. The plan neither specifies the overall size of the reduction nor the specific date of the start of normalization. Yellen said only that the Fed could begin shrinking its balance sheet “relatively soon”, which means either September or December.