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Wall Street sees Fed putting balance sheet over rate hike in September - Reuters poll

Reuters  |  NEW YORK 

By Richard Leong

NEW YORK (Reuters) - Wall Street's top banks brought forward their expectations for when they think the Federal Reserve will begin reducing its $4.5 trillion bond portfolio to as early September, and see balance sheet reduction as more of a priority than another rise, a showed.

They see policymakers raising the bank's key overnight borrowing rate one more time by the end of 2017 and three times in 2018 despite growing concerns that inflation would fall short of their 2.0 percent goal in the foreseeable future, according to the

"The balance sheet plan seems more aggressive than previously thought," said James Sweeney, chief economist at Credit Suisse, one of the 23 firms that do business directly with the Federal Reserve.

Fourteen of the 21 primary dealers surveyed said the would announce the start of its balance sheet normalization at its Sept. 19-20 policy meeting. The rest of them said it would make such a move at its Dec. 12-13 meeting.

In a June 2 poll, six of 17 primary dealers thought an announcement would come in September, while the rest forecast it would occur at the last policy meeting of 2017.

Earlier Wednesday, the Federal Reserve's policy-setting group, the Federal Open Market Committee, offered more details on its plan to start reducing its monthly reinvestments of maturing Treasuries and mortgage-backed securities.

The also raised its benchmark overnight rates by a quarter point to 1.00-1.25 percent as expected.

Primary dealers had forecast the would start gradually unwinding its $2.46 trillion worth of government debt and $1.77 trillion of mortgage bonds.

A number of officials have spoken of the likelihood of the central bank scaling back its bond holdings which the amassed after the 2008 financial crisis in order to keep long-term interest rates low to support economic growth.

"We could put this into effect relatively soon," Chair Janet Yellen said at a conference after the FOMC meeting on Wednesday about paring the Fed's bond holdings.

The Fed's conviction that it was ready to back away from its unconventional monetary policy caught some traders off guard as bond yields recovered slightly after falling sharply earlier in the day on a weaker-than-forecast report on Consumer Price Index in May.

This focus on balance sheet reduction led economists at Wall Street's top firms to push out their outlook on the next to December from September.

In Wednesday's poll, only six of 21 primary dealers expected a in September, compared with 10 of 18 dealers in the June 2 Fourteen of 21 now forecast a rate increase in December, compared with seven of 18 in the previous

(Reporting by Saqib Ahmed, Karen Brettell, Sinead Carew, Richard Leong, Chuck Mikolajczak, Gertrude Chavez-Dreyfuss and Caroline Valetkevitch; Editing by Meredith Mazzilli)

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