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PFM Asset Management LLCREDWOOD CITYFor the Quarter Ended June 30, 2017Market UpdateAt the June FOMC meeting, the Federal Reserve laid out its plan to reduce the size of its balance sheet, which stands at $4.5 trillion after multiple rounds of quantitative easing following the 2007 financial crisis. Fed officials expect to begin implementing the program this year, provided the economy evolves broadly as anticipated.The Fed plans to gradually reduce its holdings by decreasing reinvestments of principal payments on its U.S. Treasury and agency mortgage-backed securities. The pace of this decline will be limited by a cap that starts at $10 billion per month, increasing every three months until it reaches $50 billion per month.Fed’s Balance Sheet Normalization PlanSource: Bloomberg, The Federal Reserve, FRB of St. Louis, as of 6/15/17. Projection is based on maturity schedule of Fed’s Treasury holdings and caps on reinvestments as described in FOMC’s June 2017 addendum to the Policy Normalization Principles and Plans, assuming normalization begins in January 2018.$0$1$2$3$4$520032004200520062007200820092010201120122013201420152016201720182019(in trillion)Fed’s Total Balance Sheet AssetsTreasuryMortgage-BackedFederal AgencyOtherProjection(in billion)TreasuryHoldingsAgencyMBS HoldingsTotal Fed AssetsDec 2017 $2,465 $1,770 $4,470Dec 2019(Projected)$2,035 $1,410* $3,680Difference: $430 $360* $790QE3QE2*MBS projection assumes that principal payments will alwaysexceed the cap over the horizon period (i.e., the monthly run off amount is equal to the cap).196.1.C. - Page 31