Silver as an investment

Fed’s Normalization Plan and Gold

sunshineprofits.com / ARKADIUSZ SIEROŃ / JUNE 16, 2017

On Wednesday, the Fed issued addendum to the Policy Normalization Principles and Plans. What does it mean for the gold market?

The FOMC not only hiked interest rates at its last meeting, but also laid out a plan to unwind its $4.5 trillion balance sheet. In the May edition of the Market Overview, we wrote that the normalization process “will be passive, gradual and well communicated to the market. And the size of the balance sheet will not return to the pre-crisis level.” Indeed, the Committee “currently anticipates reducing the quantity of reserve balances, over time, to a level appreciably below that seen in recent years but larger than before the financial crisis.” Hence, investors should not expect a quick and abrupt decline in the Fed’s balance sheet.

The unwinding of the U.S. central bank’s balance sheet will be gradual, as the Fed will steadily decrease its reinvestment of the principal payments it receives from owned securities. These payments will be reinvested only to the extent that they exceed gradually rising caps, which are as follows:

  • For Treasury securities, the cap would be set at $6 billion per month, increasing by $6 billion increments every three months over a 12-month period until it reached $30 billion per month.
  • For agency debts and mortgage-backed securities, the cap would be set at $4 billion per month, increasing by $4 billion increments every three months over a 12-month period until it reached $20 billion per month.

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