While we have factored in a 25bps rate hike during the June FOMC meeting, we will not be surprised if the Fed changes its mind. There is a possibility that the Fed may decide to end the bond reduction programme much earlier than expected, probably by 2019 or 2020. Much will depend on the tightness of liquidity and the risk of inverting the yield curve sooner than expected.

If the Fed decides to end the balance sheet reduction much earlier than expected, we can expect the rate hike cycle coming to an end much quicker. With inflation still muted, it limits the Fed’s aggressiveness on its rate hike mission for now. It would also mean that the size of the balance sheet reduction will probably be around US$3.7tril – US$3.9tril as opposed to from US$4.5tril to US$2.5tril.

• We will not be surprised if the Fed changes its mind on a rate hike in this week’s FOMC meeting. While having factored in a 25 basis points (bps) rate hike during the June FOMC meeting, there is a possibility that the Fed may indicate on its intention to reduce the level of bonds being held on its balance sheet.

• As opposed to reducing the balance sheet from its peak of US$4.5tril to US$2.5tril which could run well into the next decade, there are possibilities for the Fed to end it much earlier between 2019 and 2020. Should that happen, the size of the balance sheet reduction will be around US$3.7tril – US$3.9tril. Much will depend on the level of liquidity tightening in the financial markets and the risk of inverting the yield curve much earlier.

• If the Fed decides to end the balance sheet reduction much earlier than expected, we can expect the rate hike cycle coming to an end much quicker. With inflation still muted, it limits the Fed’s aggressiveness on its rate hike mission for now. Also thus far, the balance sheet reduction has not resulted in a severe disruption

Source: AmInvest Research - 11 Jun 2018