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Indianomics: Fed has very little experience with balancesheet reduction, says Citi
The root of the bond markets worries are the recent Federal Open Market Committee's (FOMC) minutes, which signal 50 basis points (bps) hikes in some meetings. CNBC-TV18’s Latha Venkatesh caught up with Nathan Sheets of Citi and Chetan Ahya of Morgan Stanley to understand what all this means for the global economy and emerging markets.
The root of the bond markets worries are the recent Federal Open Market Committee's (FOMC) minutes, which signal 50 basis points (bps) hikes in some meetings.
The minutes also call for a reduction of the Fed's balancesheet by $95 billion a month, which will mean a $1 trillion reduction in the money supply. CNBC-TV18’s Latha Venkatesh caught up with Nathan Sheets of Citi and Chetan Ahya of Morgan Stanley to understand what all this means for the global economy and emerging markets.
“The Fed really has very little experience with balancesheet reduction. I think as a result of that the uncertainty around these impacts is very high. We just don't know what these effects are going to look like, how broad they're going to be, and, and so forth. And I think that's the reason why the Federal Reserve is proceeding, I would characterize the $95 billion a month pace, as moderate, there were some analysts who were calling for much faster reductions in the balancesheet. There's just a lot of uncertainty around this, both in terms of what it's going to mean for interest rates, particularly 10-year treasury yields, and also how the market will adjust to the reduction in liquidity and we're likely to see some effects through both of those channels. But this is a very uncertain tool,” said Sheets.
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“The markets have got the indication from the Fed as to what it is going to do and so in some ways, now this development is in the price. And what we see is the 10-year real yields are still negative, of course, they have risen quite significantly over the last few weeks but it's still around minus 10 basis points. So from the emerging markets (EMs) perspective, what matters is how high the 10-year real yields are evolving into and on the other side, you want to watch what the emerging markets are seeing in terms of their own macro stability indicators, as well as a real rate differential with the US. When you consider all these factors taken together, we think emerging markets, as well as Asian markets, are pretty well-positioned. And that's reflected in the way the currencies are behaving so far,” said Ahya.
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First Published: Apr 12, 2022 3:14 PM IST
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