VIEW: J.P.Morgan Tweak Fed View

J.P.Morgan note that “it’s pretty clear that Fed officials have an itch to hike by 50bp. Not wanting to fight the Fed or their itches, we are now replacing our expectations for 25bp hikes in May and June with 50bp moves, reverting to 25bp hikes in July and thereafter, and seeing the funds rate getting to 2-7/8% next year followed by an extended pause.”

• “Separately, the minutes to the March FOMC meeting will be released a week from today. In his latest post-meeting press conference, Powell indicated that those minutes would provide more detail on the plans for the Fed’s balance sheet reduction (also called QT), which will very likely begin after the May FOMC meeting. The major open questions we see are the size of the “caps” on the monthly amount of the portfolio’s principal payments that are not reinvested, the phase-in period of those caps, and the fate of the Fed’s T-bill portfolio. In the ’17-’19 QT the maximum monthly cap size was $30 billion for Treasuries and $20 billion for mortgages. The phase-in period was just over a year. T-bills were not an issue since there were none in the Fed’s portfolio.”
• “A number of Fed speakers have already intimated that the monthly caps will be larger this time. Our best guess is that this means about double the size of the previous caps: $60 billion for Treasuries, $30 billion for mortgages. These Treasury caps would only bind once a quarter, on refunding months. The mortgage caps might never bind, and we think many Fed officials would be fine with that, given their desire to get mortgages off the balance sheet as quickly as possible. We still think there will be a phase-in period to get to those maximum cap sizes; concerns about Treasury market functioning should argue against going immediately to the maximum cap sizes after the May meeting. Our best guess is the phase-in period occurs over three meetings, significantly faster than in QT1.”
• “The Fed currently has a portfolio of $326 billion in T-bills; it had none going into QT1. We see a case for applying the Treasury caps only to coupon securities, exempting bills from the caps, and thus letting them roll off the balance sheet as they mature.”