SocGen - Fed Exit – Losing the weight before raising the rate

7/27/2019 SocGen - Fed Exit Losing the weight before raising the rate

1/13

Macro Commodities Forex Rates Equity Credit Derivatives

Please see important disclaimer and disclosures at the end of the document

2 May 2011

EconomicsBeyond the Cycle

www.sgresearch.com

American ThemesFed Exit Losing the weight before raising the rate

US Economic Team

Aneta Markowska(1) 212 278 [email protected]

Rudy Narvas(1) 212 278 76 [email protected]

Brian Jones(1) 212 278 69 [email protected]

Martin Rose(1) 212 278 [email protected]

The easing cycle is set to end in June. The Fed is likely to take a brief pause before moving onto outright tightening. We look for exit steps to be staggered, starting around September. Ratehikes themselves should come late in the exit process. Relative to market expectations for aQ12012 rate increase, we see the risks skewed toward a later tightening. Easy bias until proven wrong Baseline economic forecasts point to rate hikes in early2012, consistent with current market expectations. Yet, the Fed has undershot in the past two

cycles and is likely to do so again. For this reason, our tightening scenario is late but hard as

opposed to the smoother path currently priced in.

Fiscal headwinds The economy has reached cruising altitude, but is still flying at a slowspeed as consumers spend reluctantly. Meanwhile, fiscal clouds are building and threaten the

outlook. We do not assume severe austerity in the next two years, but the mere risk could

slow the Fed.

Baby steps We see rate hikes as a later step during the exit process. Before hiking, the Fedhas to end MBS reinvestments, tackle excess reserves and drop the extended language. We

believe that these steps will be taken cautiously, one at a time. Doing it all at once and hiking

rates within a six-month period may be too aggressive.

Asset sales will come last Asset sales will have to be done eventually, but the Fed isunlikely to rush this step. We adopt the Feds baseline scenario of a gradual balance sheet

normalization starting in 2012 and ending in 2016. This will likely involve MBS sales first, and

eventually include Treasury redemptions.

Exit Timeline

Source: Global Insight, SG Cross Asset Research/Economics

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USD bln% Fed Funds Rate (LHS)

Fed's Securities Portfolio (RHS)

Step 3: Begin reserve

drain (Q3/Q4)

Step 5: Start raising

rates(mid-2012)

Step 1: End ofQE2 (June)

Step 2: End MBS

Reinvestments

(Q3)

Step 4: Remove

"extended" promise (Q4)

Step 6: Asset

sales (2H'2012)

This document is being provided for the exclusive use of MARTIN ROSE (SGCIB)


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2 May 2011

No more easing, but dont expect fast tighteningThe Feds easing cycle is coming to the end. QE2 is set to end in June and naturally the focus

will shift to exit strategies. We do not anticipate QE3, both because the economic outlook

does not warrant it, and because the Fed views the trade-offs as increasingly less attractive.

We see the exit process as a long series of baby steps which are likely to be taken

individually, allowing the Fed to evaluate the impact of each one, before moving on to the

next. Among the first steps will be ending MBS reinvestments, which we expect during Q3.

Next, the Fed will have to tackle excess reserves which are currently putting downward

pressure on the overnight rate. The extended language will also have to go, most likely late

in the fourth quarter. We see all these steps as pre-conditions to actual rate hikes.

We do not expect outright rate increases until mid-2012, with a bias toward Q3. This view

reflects what we believe is a bias at the Fed toward the unemployment mandate. It alsoreflects the risk that fiscal headwinds may dampen the recovery. To protect against the

downside, the Fed is likely to wait until inflation risks actually materialize. This is why our

tightening scenario is late but hard.

Asset sales will be an integral part of the Feds tightening cycle, but those are likely to come

last. We adopt the Feds baseline scenario of a gradual balance sheet normalization starting in

2012 and ending in 2016. This will likely involve MBS sales and Treasury redemptions.

An easy bias until proven wrongThe Feds bias is clear: protecting against downside risks and taking its chances on future

inflation. This is where the Fed differs considerably from its European counterparts. We seeseveral reasons for the different reaction functions. The dual mandate means that the Fed

cannot focus solely on inflation; unemployment remains very high and the less generous

welfare system in the US gives further urgency to this part of the Feds mandate. Lastly, the

contrasting approaches to policy also have strong roots in history. Ben Bernanke, a student of

the Great Depression, has concluded in his past research that monetary policy errors were a

significant factor behind the long economic slump of the 1930s. One of those errors was the

premature tightening of both monetary and fiscal policies in 1936, which induced another

deep recession that pushed the unemployment rate from 14% back to 19%. These lessons

seem to figure prominently on the minds of many Fed officials who are not yet convinced that

the economy has reached escape velocity. They are also concerned about maintaining growth

in the face of fiscal austerity which is inevitable over the next five years.

A sharp rebound in economic activitylike those that often follow deep recessions does not

appear to be in the offing. One key factor restraining the pace of recovery is the construction

sector []. In addition, spending by state and local governmentsseems likely to remain limited

by tight budget conditions.Yellen, April 11, 2011

We are probably going to have excess slack in the US labor market at least through the end of

2012, and thats one reason that colored my view that we shouldnt be overly enthusiastic

about tightening monetary policy too earlyDudley, April 11, 2011

The public sector in the United States must stabilize its finances and reverse the accumulationof debt that has accelerated in recent years. This process of public sector deleveraging an

element of fiscal rebalancingis mostly ahead of us.Lockhart, April 4, 2011

Bernanke on QE3:

Why not do more [QE]? The

trade-offs are gettingare

getting less attractive at this

point. Inflation has gotten

higher. Inflation expectations

are a bit higher. It is not clear

we can get substantial

improvements in payrolls

without some additional

inflation risks.

Ben Bernanke, April 27, 2011



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2 May 2011 3

Not out of the woods yet fiscal challenges lie aheadThe course of monetary policy in the coming years will be heavily influenced by what happens

on the fiscal front. US public finances are a train wreck waiting to happen and there is nodoubt that significant fiscal consolidation will have to occur over the next five years. The

question is not if, but when. In a perfect world, the fiscal drag will be offset by e xternal

demand and by business investment needed to support that demand. This scenario is

certainly achievable, but there is also a lot that could go wrong if the timing of these

adjustments is mismatched.

Chart 1: Not out of the woods yet Next up, government de-leveraging


The Fed would like Congress to take a long-term approach to deficit reduction, in line with the

proposals of the bipartisan commissions recommendations. If those recommendations were

adopted, the fiscal drag would start in 2013, shaving about 0.5-0.9% from GDP growth, and

increasing to 0.8%-1.8% by 2015. By that time, the economy should be on a firmer footing

and have a better chance of withstanding the shock. However, Republicans in Congress are

pushing for more immediate spending cuts which, if passed, would only delay Fed tightening.

How much easing has been done?The Feds easy bias is quite apparent in the amount of easing the Fed has done to date. Using

a simple Taylor Rule with the most relaxed assumption on NAIRU (non-accelerating inflation

rate of unemployment) suggests that the neutral fed funds rate reached a low point of -2.2%

in late 2010. How much easing has the Fed actually done? A recent study performed jointly by

the San Francisco Fed and the Federal Reserve Board1

has attempted to quantify the impact

of QE1, QE-lite and QE2 on the economy. The study concluded that the balance sheet effects

associated with all three phases of quantitative easing have reduced the 10yr Treasury yield

by roughly 60 basis points. This is equivalent to a 300 basis point reduction in the short-term

interest rate. Therefore, we can conclude that the Fed is targeting a fed funds rate of -3%,

which is below even the more conservative Taylor Rule estimates. This extent of

undershooting the prescribed policy rate is consistent with the Feds decisions during 2002 -

2005 when policymakers were responding to deflationary risks amid a sub-par recovery.

1 Chung, Laforte, Reifschneider, Williams, Have we underestimated the likelihood and severity of zerolower bound events, Federal Reserve Bank of San Francisco, January 2011

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% of GDP

US House holds

US Busine sses

US GovernmentRest of World

Savings-Investment Balances by SectorBernanke on

fiscal/monetary interplay:

Now, my preference in terms

of addressing the long-term

deficit is to take a long-term

perspective. [ ] If the

changes are focused entirely

on the short run, then they

might have some

consequences for growth.

And in that case, the Federal

Reserve, which is as always

going to try to set monetary

policy to meet our mandate,

will take those into account

appropriately.




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Chart 2: How much easing has been done? Taylor Rule vs. adjusted overnight rate

We converted the impact of QE1, QE-lite and QE2 to equivalent rate cutsbased on conclusions of the Feds studycited in the text above.Source: Global Insight, SG Cross Asset Research/Economics

What do the Feds own forecasts imply for tightening? Running the Feds latest economic

projections (and a still relaxed NAIRU assumption) through a standard Taylor Rule suggests

that the neutral rate will turn positive in early 2012. This is consistent with the timeframe for

rate hikes currently priced in the market. The question is, will the Fed stick closely to the rule-

based approach? If the 2003-2005 tightening cycle is any indication, it is unlikely that it will.

During that cycle, the Fed undershot the prescribed rate by a wide margin and for a long time.

Chart 3: Feds economic forecasts point to rate hikes in early 2012

Feds economic projections as ofApril 2011

Source: Federal Reserve Board, SG Cross Asset Research/Economics

Our tightening scenario late but hardWe believe that the Feds easy bias will remain in place until inflation risks actually materialize.

The implication is that rate hikes will come late, but will be aggressive. We look for rate

increases to start around mid-2012, with a bias toward Q3.

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TR (base d on Fed 's NAIRU)

TR (based on SG NAIRU)

Real GDP (Q4/Q4) 3.10 - 3.30 3.50 - 4.40 3.70 - 4.60 2.50 - 2.80

Unem pl. Rate (Q4 avg) 8.40 - 8.70 7.60 - 7.90 6.80 - 7.20 5.20 - 5.60

Core PCE (Q4/Q4) 1.30 - 1.60 1.30 - 1.80 1.40 - 2.00 1.70 - 2.00

High Low High Low High Low

Taylor Rule Est imates 0.60 - -0.15 1.70 - 0.65 2.80 - 1.50

avg 0.23 avg 1.18 avg 2.15

2013 LT2011 2012



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Chart 4: NAIRU makes all the difference in the world


We believe that the Feds NAIRU assumptions are too low and that core inflation could very

well overshoot the Feds projections. However, the latest indications from Bernanke suggest

that he is willing to wait until proven wrong. Once core inflation and wage growth start

surprising on the upside, the Fed will have to reassess its assumptions about excess slack,

which will likely trigger a period of aggressive tightening. We can demonstrate this by drawing

two Taylor Rule projections, one based on the Feds low NAIRU assumption; and the other

based on what we consider a more realistic assessment of NAIRU (6.5%). We believe that the

Fed will move along the lower line until its assumptions are proven wrong, forcing it to shift to

the higher trajectory (see Chart 4).

Triggers for rate hikesThe Fed has two sets of conditions for tightening one good and one bad. Under the good

scenario, the Fed will start hiking once it sees consistent progress on employment and

evidence on inflation showing up not just in prices, but also in wages. The Fed would also feel

compelled to act if inflation expectations started to move higher this is a bad scenario

because it could rate hikes even in the context of weak economy.

1a. Consistent progress on employment. The Fed needs to see significant progress onreducing unemployment, which will take several quarters of solid employment growth. We

look for average payroll growth of 220k workers per month in 2011. All else being equal, this

would reduce the unemployment rate to 8% by the end of the year, but the improvement is

likely to be tampered by a rise in the participation rate, as discouraged workers slowly return

to the labor force. As a result, we are likely to end the year closer to 8.4%, which we view as

too high a hurdle to begin hiking rates.

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TR (bas ed o n SG NAIRU)

SG Forecas t

SG Forecasts:US / Core PCE

YE 2011: 8 .4% / 1 .5%YE 2012: 7.8% / 1.8%YE 2013: 7 .0% / 2 .0%

SG Forecasts:US / Core PCE

YE 2011: 8 .4% / 1 .5%YE 2012: 7.8% / 1.8%YE 2013: 7 .0% / 2 .0%

Bernanke on employment:

The pace of improvement is

still quite slow, and we are

digging ourselves out of a

very, very deep hole. We are

still something like 7 million-plus jobs below where we

were before the crisis, and so

clearly the fact that we're

moving in the right direction,

even though that's

encouraging, doesn't mean

that the labor market is in

good shape.




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2 May 2011

Chart 5a: Upside risks Correction in the Okuns residual Chart 5b: Downside risks Correction in participation rates

Source: SG Cross Asset Research

An upside risk is that we could see some normalization in the Okun sresidual. Okuns law is

the relationship between activity and employment growth which broke down during the latest

recession as employment losses exceeded output losses. The recent sharp drop in the

unemployment rate has raised some hope that the Okuns residual may be correcting. This is

not in our central scenario, which assumes that the Okuns residual is explained by a rise in

structural employment. If so, the correction should be very slow.

1b. Evidence of building price pressures. Headline inflation has not been and will not be a

trigger for the Fed. Indeed, the Feds prescribed policy response to oil and commodity shocks

is to do nothing. We would even argue that oil shocks tend to induce an easing bias because

the lack of pass-through implies a purchasing power squeeze which tends to be recessionary.

Until the Fed sees evidence that higher commodity prices are being passed through to goods

prices and wages, it will continue to view inflation spikes as transitory.

Vice Chairman Yellen reinforced this view recently, stating that it would be difficult to get a

sustained increase in inflation as long as growth in nominal wages remains as low as we have

seen recently. Other Fed officials have pointed out that labor costs constitute the largest

chunk of corporate cost structure and unit labor costs have been essentially unchanged since

2007.

Chart 6: Unit labor costs no sign of inflation here


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pct pts

Output Gap (LHS)

Employment Gap (RHS)

This divergence isalso referred to as

Okun's residual

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Labor Force, % of Working Population

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Bernanke on inflation:

There's not much that the

Federal Reserve can do about

gas prices per se, at least not

without derailing growth

entirely, which is certainly not

the right way to go. After all,

the Fed can't create more oil.

We don't control the growth

rates of emerging market

economies. What we can do

is basically try to keep higher

gas prices from passing into

other prices and wages

throughout the economy and

creating a broader inflation,which would be much more

difficult to extinguish.




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2 May 2011 7

2. An upward drift in inflation expectations Though the majority of Fed officials appear

sanguine on inflation, even the doves admit that they would change their mind once long-term

inflation expectations started to drift higher. Thats because expectations are believed to be

self-fulfilling: once workers start believing collectively that they have pricing power and

demanding wage increases, those are more likely to come through; the same holds true for

businesses because collective action increases the chances that price increases will stick.

There is no perfect measure of long-term inflation expectations. Of the imperfect measures,

we believe that the Fed watches two particularly closely: long-term consumer expectations

from the University of Michigan survey and the 5y5y forward inflation breakeven implied by the

Treasury market. The Fed also has its own measure of the 5y5y forward which adjusts for

liquidity and other distortions. So far, neither of these measures gives the Fed cause for alarm.

Chart 7a: Consumer inflation expectations Chart 7b: Market inflation expectations

Source: SG Cross Asset Research/Economics

Exit steps LIFO, FIFO, or a custom strategy?The chronology of exit steps is crucially important in timing the first hike, even if we get the

economic outlook right. The Taylor Rule suggests that the neutral rate has started to move

higher, but should the Fed be responding by shrinking the balance sheet or raising rates?

Some Fed officials have been advocating a last in, first out approach which implies that the

balance sheet should be normalized before rate hikes. This would certainly be the more

elegant approach, which would allow the Fed to keep rates at zero until the neutral rate turns

positive. Yet, other Fed officials worry that a rapid unwinding of the balance sheet couldtrigger dislocations in the financial markets and instead have argued for a first in, first out

approach. Yet, hiking the overnight rate when the neutral rate remains deeply negative is also

a risky strategy. Other voices at the Fed are calling for a hybrid approach which combines rate

hikes with gradual asset sales.

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Expected inflation, 5-10 year ahead

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Fed's adjusted 5y5y forward

From Inflation Swaps

Bernanke on inflation

expectations:

Ultimately, if inflation

persists or if inflation

expectations begin to move,

then there's no substitute for

action.




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2 May 2011

Chart 8: Chronology of exit steps LIFO, FIFO or a mix?


Tackling the balance sheet will the Fed ever sell assets?We believe that asset sales will be an integral part of the Feds exit strategy; however it is

likely to be the last step and one that is taken gradually. The most explicit guidance on asset

sales was given in the April 2010 FOMC minutes, where most participants expressed apreference for strategies that would eventually entail sales of agency debt and MBS in order to

return the size and composition of the Federal Reserves balance sheet to a more normal

configuration more quickly than would be accomplished by simply letting MBS and agency

securities run off. On timing, most FOMC members agreed that the required sales should be

spread over five years.

Chart 9a: The Feds securities portfolio with MBS/agency runoff

The charts above assume that the Fed ends its reinvestment policy in September 2011. MBS portfolio runoff basedon a CPR of 0.20. Agency portfolio runoff based on actual maturities.


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TR (base d on Fed's NAIRU)QE QE

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Securities Trend

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Agency Debt

MBS

Pre-crisis TrendSG baseline s cenario

MBS/agency runoff wouldstil l leave the Fed with a

balance sheet that is

$700bn too large

Bernanke on MBS

reinvestments:

At some point, presumably

early in our exit process, we

will[]stop reinvesting all orpart of the securities which

are coming -- which are

maturing. But take note that

that step, although a relatively

modest step, does constitute

a policy tightening, because it

would be lowering the size of

our balance sheet and

therefore would be expected

to essentially tighten financial

conditions.




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2 May 2011 9

More recently, Vice Chairman Janet Yellen reaffirmed the five-year baseline scenario which

would normalize the Feds balance sheet by mid-20162. She did not do so explicitly, but by

endorsing a recent Fed study in which the authors assumed full normalization of the Feds

balance sheet by mid-2016, with outright sales beginning in mid-2012. We have adopted this

as our baseline scenario.

Given these assumptions, how much assets will the Fed have to sell per month? First, it must

be noted that the underlying trend line for the size of the Feds security portfolio is a moving

target which tends to rise in line with demand for money, or broadly in line with nominal GDP.

We estimate that by mid-2016, the Fed should be targeting a $1.3tn securities portfolio. The

actual size of the Feds securities holdings will reach $2.6tn by the end of QE2, suggesting

that over the next 5 years, the Fed will have to somehow dispose of $1.3tn of assets.

As was confirmed by Chairman Bernanke during his inaugural post-FOMC press conference,

ending MBS reinvestment will be one of the first steps in the exit process. Estimating the size

of principal repayments is not an easy feat as it depends on interest rates, home prices,

housing demand and other factors. Instead, we make a simple assumption that the recent

prepayment speeds continue. For agency debt, we use actual maturities to estimate the

runoff. Combined, these two portfolios should reduce the Feds balance sheet by about

$600bn through 2016, leaving it still $700bn above the target (see Chart 9a).

Chart 9b: The Feds securities portfolio with MBS and agency runoff and outright sales

The charts above assume that the Fed ends its reinvestment policy in September 2011. MBS portfolio runoff based ona CPR of 0.20. Agency portfolio runoff based on actual maturities. Outright sales begin in mid-2012 at $9bn per monthfor MBS and $500mln per month for agency debt.


As indicated in the April 2010 FOMC minutes, the next likely step will be outright sales of MBS

and agency debt, in line with the Feds goal of normalizing not just the size, but also the

composition of its portfolio. Assuming that outright sales begin in mid-2012, we estimate that

the Fed will have to sell about $9bn in MBS securities and $500mln in agency debt per month

in order to fully dispose of these assets by 2016. We believe that the market will be able to

absorb this pace of sales relatively easily. But, before the Fed begins, it will have the

opportunity to gauge the market impact based on Treasurys experience. The Treasury

Department acquired its own MBS holdings following the collapse of Fannie Mae and Freddie

Mac in 2008. It recently announced that it would gradually dispose of its holding by selling

2Unconventional Monetary Policy and Central Bank Communications, speech by Janet Yellen, February25, 2011

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Agency Debt

MBS

Pre-cr isis Trend

SG base line scenario

MBS/agency runoff andsales would still leave theFed with a balance sheet

that is $400bn too large



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2 May 20110

about $10bn per month through mid-2012. Perhaps it is no coincidence that the Fed plans to

begin its asset sales around the same time. As for the market impact, so far the Treasury has

sold about $5bn with no noticeable impact on spreads.

Chart 9c: The Feds securities portfolio with MBS/ agency runoff and sales; plus Treasuryredemptions

The charts above assume that the Fed ends its reinvestment policy in September 2011. MBS portfolio runoff based ona CPR of 0.20. Agency portfolio runoff based on actual maturities. Outright sales begin in mid-2012 at $9bn per monthfor MBS and $500mln per month for agency debt. Treasury runoff based on actual maturities.


Disposing of all its agency and MBS holdings will still leave the Fed with a portfolio that is

$400bn above target (see Chart 9b). That means that the Fed will have to reduce its Treasury

holdings at some point. However, rather than outright sales, it could do so simply viaredemptions of maturing bonds. Based on current maturities, we estimate that about $600bn

of Treasury notes and bonds will mature between 2012 and 2016. Allowing all of these issues

to roll off would actually shrink the Feds balance sheet ahead of schedule (see Chart 9c).

Instead, the Fed could reinvest $200bn of those proceeds into Treasury bills. This would

return the Feds portfolio to the desired size and also help reduce the duration which is

another stated goal.

Excess reserves a thorn in the Feds sideOne of the problems with a gradual reduction of the Feds balance sheet is that the liability

side, or excess reserves, will also normalize very slowly. This may become a problem when

the Fed attempts to raise rates, because the effective overnight rate will be pressured lower in

the presence of large excess reserves. The interest paid on excess reserves (IOER) is a tool

that should be putting a floor under the effective fed funds rate, but there are a number of

players in the overnight market who do not have the ability to deposit funds at the Fed. This

has been a source of slippage and the reason why the effective rate has been trading 10bps

to 15bps below the IOER. The recent change in FDIC rules has widened the spread further.

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Agency Debt

MBS

Pre-crisis Trend

SG base line scenario



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2 May 2011 11

Chart 10: Excess reserves a thorn in the Feds side?


Given the remaining QE2 purchases, excess reserves are likely to reach $1.7tn by the end of

June. Our equations suggest that at this level of reserves, an IOER of 1.0% would produce an

effective fed funds rate between 0.82% and 0.86%. In order to restore the effectiveness of the

Feds corridor system (with IOER being a floor and the discount rate being the ceiling for the

overnight rate), the Fed will have to tackle excess reserves before attempting to raise rates.

This will likely be done through a combination of reverse repos and term deposits. The Fed

could also bring back the SFP (Supplementary Financing Program) whereby the Treasury

issues bills to mop up liquidity and deposits the proceeds at the Fed. Before reviving this

program, however, Congress will have to increase the debt ceiling.

Chart 11: A broken rate corridor


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Conclusion Exit steps, in orderBased on the above considerations, we assume the following sequence and timing of exit

steps:

1. End of QE2 The April FOMC statement confirmed that QE2 will end on schedule; that is

at the end of June and after reaching the $600bn target. This will mark the official end of the

Feds easing cycle; it is not the beginning of tightening.

2. Halting MBS reinvestments Bernanke noted during the press conference that halting

MBS reinvestments will most likely occur early in the exit process. We assume that the Fed

will wait a few months following the end of QE2 to assess the impact before taking this next

step. The August 9 FOMC meeting may be a little too early, and therefore we assume that

MBS reinvestments will be ended in September.

3. Liquidity draining operations We believe that this needs to be done ahead of rate

hikes, or else the effective fed funds rate will trade away from the target. This is not an issue

today with the fed funds target being a range, but could become a problem as the Fed

attempts to push rates higher. Ending the policy of MBS reinvestments will help to shrink

excess reserves but only by about $25bn per month. Therefore we look for the Fed to take

additional steps to drain excess reserves via a combination of reverse repos, term deposits,

and possibly by restoring the Supplemental Financing Program (SFP), however the latter is

subject to Congress increasing the debt ceiling. We assume that the Fed will announce this

step in the second half of the year, most likely in November. This will be an early signal to

the markets that the Fed is preparing for an eventual hike in the fed funds rate.

4. End of extended language During his press conference, Bernanke indicated that

extended means a couple of meetings, though it could be more or less i f conditions

warrant faster or slower adjustments. His definition is broadly consistent with indications

from other Fed officials who have estimated extended to mean about 6 months. Giventhe timing of our rate call and the timing of the first two steps, we assume that the

extended language will be dropped at the end of the year, most likely during the

December 13 FOMC meeting.

5. Rate hikes Our call is for mid-2012, with a bias toward the third quarter. We assume

that the fed funds target and the Interest On Excess Reserves (IOER) will move at the same

time.

6. Asset sales We believe that outright asset sales will begin around the time of the first

rate hike. The Fed has indicated a goal of returning the size and composition of its

securities portfolio to pre-crisis trend over 5 years. We believe it will start by selling about

$10bn per month, evenly split between Treasuries and MBS securities. The reduction of the

Treasury portfolio could alternatively be achieved via partial redemptions of maturingsecurities.



13/13

American Themes

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SocGen - Fed Exit – Losing the weight before raising the rate

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