Fed: Early decision calms markets but not a policy change – Standard Chartered

Sonia Meskin, US economist at Standard Chartered, points out that in the past, Fed officials have stated that the long-run system open market account (SOMA) size could range between USD 2.5tn and 3.5tn.

Key Quotes

“With the January 2019 size of SOMA just over USD 3.8tn, against the backdrop of heightened financial-market volatility, it would be understandable for investors to ask questions regarding the ultimate size of the portfolio.”

“We argue, however, that the SOMA taper has had a limited impact on broad US financial conditions, though it has, among other factors, potentially contributed to tightening money-market and USD liquidity conditions.”

“If the Fed stuck to the programme rigidly, this could have changed in 2019, when SOMA maturities are projected to accelerate, especially amid notably weaker global growth, waning fiscal spending and rising risks to business investment.”

“Considering these risks, the Fed has bought greater flexibility by formally adopting the abundant reserve management framework sooner than markets expected: the decision helped soothe investor concerns about the possible risks associated with tightening liquidity without forcing the central bank to commit to a specific long-run SOMA size – yet.”