FXStreet (Delhi) – Research Team at Goldman Sachs, suggests that there are several dimensions along which this tightening cycle, as they predict it, will be very different from those of the past.
Key Quotes
“The following are likely to matter for macro rates:
• We expect a longer cycle than observed in the recent past. We expect it to take about three years for the Fed to end the tightening cycle. In our view, this increases the likelihood that positive or negative shocks will hit the US economy, which would require a change of plan. This suggests to us that rates volatility will remain high, particularly until more certainty emerges on the pace of hikes and visibility on the terminal rate.
• The central bank can use a range of instruments to tighten its policy stance: the interest rate on excess reserves, overnight reverse repo facility, term deposit facility and SOMA portfolio. The Fed’s ability to raise the federal funds rate in the context of its large balance sheet is untested and, hence, the possibility that the Fed will need to use a different set of instruments than it currently expects cannot be ruled out.
• In addition to the technical considerations about whether to use one instrument or another, the political economy and fiscal implications of this tightening cycle can also become more prominent. Recall that, since 2008, the Fed has remitted the coupon paid on its SOMA portfolio to the US Treasury. The Fed’s primary tool to raise the federal funds rate will be the interest rate it pays on excess reserves, which will imply that the Fed’s ability to remit coupon payments to the US Treasury will fall, end or even become negative, depending on the speed at which the Fed will have to tighten.”
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