The Federal Reserve's push to shrink its record USD9 trillion balance sheet could have a larger impact on financial conditions if markets become disorderly, according to an Atlanta Federal Reserve report published Thursday.
"A $2.2 trillion passive roll-off of nominal Treasury securities from the Federal Reserve’s balance sheet over three years is equivalent to an increase of 29 basis points in the current federal funds rate at normal times, but 74 basis points during turbulent periods," when the 10-year Treasury yield volatility increases by 40%, according to research by economist Bin Wei. However, during a crisis period with risk aversion being doubled, it it could be equivalent to a nearly 100-basis-point increase.
A separate Kansas City Fed blog released earlier this week said QT will be larger than the first endeavor in 2017 and will occur at a time when financial markets are strained, suggesting this round of QT has the potential to be more disruptive. Ex-officials have also told MNI QT could have a larger impact. (See: MNI: Fed QT May Have Deeper Tightening Effect - Ex-Officials)
Source: Atlanta Fed