Fed will take the expected step

The Fed is going to shrink its balance sheet this week. According to the data from the previous meeting, the rate of shrinkage, which was 47.5 billion dollars per month, will increase to 95 billion dollars as of September. This move is expected to be the biggest drop for September and October bond stocks.

The Fed's balance sheet shrinkage will accelerate this week. The Central Bank will increase the monthly upper limit for the amount of treasury and mortgage-backed securities to $60 billion and $35 billion, respectively. 

According to the news in Bloomberg, this means that the central bank will finally start to empty the Treasury bonds that it started saving almost three years ago. September will be the first month in which the results of the balance sheet reduction will be reflected, as coupons will fall below the monetary authority's new upper limit.

According to Bloomberg, the Fed has $43.6 billion in Treasury coupons due in September, which means officials must release $16.4 billion in bonds as well. It will also need to let another $13.6 billion go in October. This will be the biggest drop for the invoice portfolio through September 2023.

The pandemic has shaken the economy

In September 2019, the Fed began buying approximately $60 billion a month of Treasury bonds to strengthen its reserve balances alongside daily repo operations. The economic turmoil caused by the pandemic has spurred a wave of fiscal and monetary stimulus as the bank expects to purchase bonds by the second quarter of 2020. Then, as its financial system was flooded with cash, reserves remained redundant.

What are your thoughts on the Fed's decision? What effect does it have on the economy?