MA’s Ken Matheny was quoted in the article, “Boring is best as Fed contemplates smaller balance sheet” by David Nicklaus of the St. Louis Post-Dispatch. (Excerpts shown below.)
It was a big deal when the Federal Reserve bought trillions of dollars in bonds to boost the economy. Now that the Fed is about to reverse the process, we’re told it will be about as exciting as watching paint dry.
Why the difference? For one thing, we’re not in a financial crisis, and the Fed plans to subtract those trillions more gradually than it added them.
So far, markets have reacted calmly as one Fed official after another has discussed the balance-sheet reduction process.
“It’s not really going to have a major impact on the outlook for bond yields,” said Ken Matheny, an economist at Macroeconomic Advisers. “Markets should be very well prepared for this, because the Fed has told us for years it was going to happen.”
Matheny says studies show that the Fed reduced long-term rates by about 0.03 percentage point for each $100 billion of bonds it bought between 2008 and 2014. A $2 trillion runoff, then, might push long-term rates up 0.6 percentage point.
The economy is much healthier, though, than it was when the Fed was buying bonds to inject liquidity. “To the extent financial markets are functioning more or less normally today, there’s an argument that the impact may be smaller now,” Matheny said. (Click here for article)