NEW YORK, July 10 U.S. primary dealers did not
expect the Federal Reserve to start trimming its bloated balance
sheet until early 2016, after the central bank finally raises
interest rates, according to a survey conducted last month.
The regular survey, done by the Federal Reserve Bank of New
York to help the Federal Open Market Committee members prepare
for the June 17-18 policy-setting meeting, suggested many of the
Fed's key messages in recent months have sunk in on Wall Street,
including the expectation that rates in general will be lower
than historical norms over the long run.
The U.S. central bank is still adding to its balance sheet,
which is approaching $4.5 trillion after years of monetary
accommodation. The primary dealers, which do business directly
with the Fed, expect the central bank's balance sheet to swell a
bit more this year and then flatline throughout 2015 before
beginning to shrink in the first quarter of 2016.
They expect the Fed to lift its benchmark federal funds rate
in the third quarter of next year, according to median responses
from the 22 dealers polled between June 5-9. The New York Fed
published the results as usual three weeks after the meeting, at
which the Fed made little change to policy.
In a speech on May 20, New York Fed President William Dudley
said he would prefer to keep reinvesting funds from maturing
assets in the portfolio until sometime after the rate rise,
which was a change from the Fed's previous plan. In the survey,
several dealers cited that speech "as causing them to push back
their expected timing" of the end of reinvestments.
The dealers also lowered predictions of where the fed funds
rate would ultimately settle in the longer run - to 3.5 percent
from 3.75 percent in the survey done six months earlier. The fed
funds rate is the rate that banks charge each other for
"Some dealers noted their expectation for a lower longer-run
federal funds rate as being driven by their perception of lower
potential GDP growth," the poll results showed.
According to minutes of the Fed's June meeting, released on
Wednesday, policymakers are indeed expecting to raise rates
before shrinking the balance sheet.
The minutes also showed that officials are eyeing a
relatively large spread of 20 basis points between a rate on
overnight reverse repurchase agreements, or reverse repos, and a
rate on excess bank reserves, known as IOER.
The survey telegraphed this, showing dealers expected the
repo rate (O/N RRP) to be 0.28 percent and the IOER to be 0.50
percent once the Fed lifts its key fed funds rate, according to
the median responses. They expected the fed funds rate would be
0.38 percent at this point.
Several dealers "put particular emphasis on the use of the
O/N RRP rate and the IOER rate (and) noted that the federal
funds rate may be de-emphasized in importance as a policy rate
due to the diminished size of the federal funds market relative
to the pre-crisis period," the survey said.
(Reporting by Jonathan Spicer; Editing by Jan Paschal)