US and Europe

US Federal Reserve commences asset sale

Tuesday September 26, 2017 Hugh Dixon

The US Federal Reserve announced in late September 2017 that it will begin one of the largest mass sales in its history.  The US Federal Reserve is seeking to reduce the US$4.5 trillion in American security assets it currently holds.  Around 80 percent of the US Federal Reserve’s current security assets were amassed over the six year period between 2008 and 2014.  During this period the US Federal Reserve undertook three rounds of quantitative easing to boost the US economy struggling with the effects of the Global Financial Crisis.  This quantitative easing program saw the US Federal Reserve buy up US treasury bonds and US mortgage backed securities from the private sector, to stimulate the economy.

 

With this announcement, the US Federal Reserve shows that it believes the US economy is finally in a strong enough position and showing enough sustained GDP growth that the US Federal Reserve can effectively reverse the quantitative easing program it run between 2008 and 2014.     

 

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The US Federal Reserve went from holding just under US$1 trillion in assets prior to the crisis, to holding US$4.5 trillion when they ended their quantitative easing programs in 2014.  In order to avoid rattling and depressing the US stock and money markets, slowing down the US economy, or affecting bond yields, the US Federal Reserve plans to sell just US$10 billion in assets each month.  At this rate it will take the US Federal Reserve almost 350 months or 29 years to sell off the US$3.5 trillion in securities they acquired between 2008 and 2014.    

 

While the US Federal Reserve sell off will not directly affect New Zealand, it is a statement that the US economy is again able to sustain strong economic growth.  This is good news for one of New Zealand’s larger trading partners and should see a greater value of exports leaving New Zealand for the USA, even with the US no longer part of the Trans-Pacific Partnership agreement.