Fed to stop mortgage reinvestments in 2018: Morgan Stanley

The US Federal Reserve will stop reinvestments of its mortgage-backed securities holdings in April 2018 in an attempt to shrink its $4.2 trillion balance sheet that had ballooned from bond purchases to combat the last recession, Morgan Stanley analysts said on Friday.

Speculation about the timing and framework on the US central bank's plan to pare its holdings of MBS and US Treasury securities was rekindled after the Fed's policy meeting on Dec. 13-14 at which they raised interest rates by a quarter point. The Federal Open Market Committee, the Fed's policy-setting group, said it will continue to reinvest principal payments "until normalisation of the level of the federal funds rate is well under way."

Morgan Stanley analysts arrived at their call on the timing of the Fed ending its MBS reinvestments based on the Fed's projected 3 percent longer-run equilibrium interest rate.