Federal Reserve

Fed balance sheet unwind 'absolutely' reduces chance of more rate hikes: Former Dallas Fed advisor

Key Points
  • The Federal Reserve will be very measured when it begins to reduce its $4.5 trillion balance sheet, Danielle DiMartino Booth said.
  • However, she doesn't think the central bank will double-tighten.
  • She believes the market is starting to question a June rate hike.
Fed set to reduce balance sheet this year
Fed set to reduce balance sheet this year

Once the Federal Reserve starts to wind down its balance sheet, it "absolutely" reduces the chance of more rate hikes from the central bank, a former advisor to the Dallas Fed told CNBC on Wednesday.

Officials have recently indicated the Fed will begin to unravel its $4.5 trillion portfolio, and minutes released Wednesday from the Federal Open Market Committee meeting earlier this month shed some light on how the central bank plans to do it.

"They're going to be very measured. They'll be data-dependent. They might pull back, reduce the size," Danielle DiMartino Booth said in an interview with "Power Lunch."

"There are a lot of caveats in these minutes. But will they double-tighten? … I don't think so."

Kevin Lamarque | Reuters

According to the minutes, the central bank sees a system where it will announce cap limits on how much it will allow to roll off each month without reinvesting. Any amount it receives in repayments that exceeds the cap limit will be reinvested.

Many economists have been anticipating the central bank will increase interest rates in June and September and begin to focus on its balance sheet at its December meeting.

However, Booth, now president of Money Strong, isn't so sure the markets believe a September hike is coming, and she thinks they are also beginning to question whether it will happen in June.

"We've seen rents start to come down in many major metropolitan areas. That will feed into the inflation metrics that they pointed out in these minutes. They're concerned that inflation is declining," she said.

Ernesto Ramos, head of equities at BMO Global Asset Management, has "mild concern" about the upcoming hikes and winding down of the balance sheet.

"We've gotten to somewhat … heightened levels of valuations in the stock market and I think part of that has been sustained by the easy money. So, as that easy money goes away, gradually those valuations become more sustainable," he told "Power Lunch."

"Except earnings growth is picking up substantially … we expect that to continue in the double digits for the next year," he added.

He suggests investors stay exposed to stocks, but in a defensive way. He specifically likes Apple, Baxter International, American Express and Darden Restaurants.

—CNBC's Jeff Cox and Patti Domm contributed to this report.

Disclosures: Ramos owns Apple, Baxter International, American Express and Darden Restaurants through BMO funds.