Business

DBS CEO: Impact of US Fed's stimulus rollback limited

Financial markets may see some choppiness as the US Federal Reserve starts to reduce its U$4.5 trillion balance sheet, DBS Group chief executive Piyush Gupta said.

BLOATED

The Fed's balance sheet has been bloated by years of asset purchases designed as stimulus, but the impact of the reduction may not be as big as feared, he added.

For one thing, it will take at least five years to shrink the Fed balance sheet to about US$2.5 trillion to US$3 trillion, and that will still be about three times larger than in 2007, Mr Gupta said at DBS Private Bank's second half 2017 market outlook luncheon yesterday.

"Second, the cash reserve balances of the Fed are extraordinarily high.

"As the Fed starts reducing its purchase of treasury bonds, there is ample capacity in the system to take up some of those treasuries...

"It won't create a big liquidity squeeze in markets," he added.

Interest rates will go up, but not that sharply, he said.

"I'm confident you are not going to see interest rates going back to the 4 per cent normal.

"In fact, it may even be a struggle to get to 3 per cent."

That is because inflation will likely remain subdued as wage growth, a big driver, has not picked up much, he said.

Geopolitical uncertainty and price erosion caused by technology changes and disruption will likely keep inflation benign too, he said.

Mr Gupta's speech at the event came after the US central bank discussed the possibility of starting the process of unwinding its balance sheet this year.

Minutes from its June 13-14 meeting released on Wednesday showed that its debate highlighted divisions over the timing of roll off and unease at recent weak readings on inflation.

DBS BANKmoneyEconomy