By Seth Carpenter, Chief Global Economist at Morgan Stanley
Central banks are in focus, and the spotlight remains on rates. The Fed and the ECB paths continue to support our June rate cut forecasts, while the BoJ looks set to start its journey to normalcy. Yet, lurking in the background are central bank balance sheets. The Fed’s balance sheet has been shrinking for some time, while the BoJ’s remains sizeable, with no imminent prospect of downsizing. The ECB has also been reducing its balance sheet and just announced the principles that will underpin the framework of its policy implementation, and hence the size of its long-run balance sheet.
Markets look to central bank balance sheets for answers to questions about policy, liquidity, and signaling. The global economics team recently compiled a reference document, titled The Great Unwind, on the next steps for central bank balance sheets. The note untangles the nuances of central bank accounting and details our projections of balance sheet size across our forecast horizon. We make four key observations:
