E The Large Central Banks Shift From Quantitative Easing To Quantitative Tightening

“Effective in October 2017, the Committee directs the Desk to roll over at auction the amount of principal payments from the Federal Reserve’s holdings of Treasury securities maturing during each calendar month that exceeds $6 billion, and to reinvest in agency mortgage-backed securities the amount of principal payments from the Federal Reserve’s holdings of agency debt and agency mortgage-backed securities received during each calendar month that exceeds $4 billion.” (FOMC announcement in September 2017 relating to the planned shrinkage of the Fed balance sheet.)

We are entering a new monetary policy era since quantitative easing is fading in the U.S. and will also soon start to fade at the European Central Bank (ECB), the Bank of Japan, and the Bank of England.

Although the U.S. Fed’s balance sheet run off started at only $10 billion a month in October 2017, it was planned to eventually reach $50 billion a month, and result in a balance sheet decline to around $3 trillion by the end of 2020.

Since the economies of the euro area and Japan are also performing quite well, there is also an expectation that the ECB and the Bank of Japan will also start to reduce their balance sheet expansions in coming quarters.

Thus, on a net basis, four important central banks (including the Bank of England) are expecting to shift in a very short time frame from monetary stimulation via quantitative easing to less monetary accommodation or quantitative tightening.

The following chart created by BoAMerrill Lynch suggests that the total G4 Central Bank combined balance sheet will peak in the first quarter of this year, and then will gradually shrink.