The world is focusing on the signal of "Fed's balance sheet reduction", and Wall Street is selling bonds

As the Jackson Hole global central bank annual meeting opens, investors will pay close attention to when and how the Federal Reserve will reduce its bond purchases.

Powell is due to speak at 10 a.m. ET on Friday, and the Fed is widely expected to soon taper its $120 billion monthly purchases of Treasurys and mortgage-backed bonds.

Many investment institutions on Wall Street have already included the Fed's balance sheet reduction in the valuation adjustment of major asset classes, and have carried out various arbitrage investments and risk hedging operations in advance. (Bitui Note: "balance sheet reduction" refers to the Fed's reduction of its own balance sheet size)

The market generally believes that the Fed's balance sheet reduction will bring the 10-year US Treasury yield back to 1.6%. Since August 25, many hedge funds have been selling US Treasury bonds.

Goldman Sachs predicts that the probability of the Federal Reserve starting to shrink its balance sheet in November is 45%, and the probability of starting to shrink its balance sheet in December is 35%.

Balance sheet reduction is one of the important tools of the Fed to tighten monetary policy. Some Fed officials are worried that the huge balance sheet has led to distortions in the financial market. As the US economy returns to the track of steady recovery, the Fed's ultra-loose monetary policy must return to normal, and the Fed's balance sheet must shrink to a relatively normal level.

According to Bitpush, when the Fed held a policy meeting at the end of July, officials had discussed when and how much to reduce bond purchases. This was the first time the Fed had explicitly discussed reducing bond purchases since the outbreak of the COVID-19 pandemic last year.

In order to cope with the capital outflow pressure brought about by the Fed's balance sheet reduction and the growing inflation pressure, on August 26, the Bank of Korea raised its benchmark interest rate by 25 basis points to 0.75%, becoming the first developed economy to raise interest rates since the outbreak of the epidemic.

JPMorgan Chase & Co. strategists Teresa Ho and Alex Roever wrote in a report released Sunday that assuming the Fed announces the start of tapering in December and ends its bond purchases in August next year, the Fed will still inject about $1 trillion in liquidity into the market.

“The Fed recognized that having this level of liquidity in the market was causing inflation, and as the economy continues to rebound and reopen, it gets to the point where that liquidity is no longer needed,” said Brian Vendig, president of MJP Wealth Advisors.

“I would recommend that we announce a plan as early as our September meeting and begin the process of tapering asset purchases in October,” Dallas Federal Reserve Bank President Robert Kaplan told Yahoo Finance in an interview Thursday.

Kaplan said he wants to schedule the reductions over about eight months, which would slow its monthly Treasury purchases by about $10 billion.

Economists at Cornerstone Macro believe that the current COVID-19 situation has prevented Powell from continuing to promote tapering. The agency said on Tuesday: "We expect Powell to reiterate the main message of the July FOMC policy meeting minutes, and the reduction of asset purchases may begin at the end of this year."