Overnight, the US Federal Reserve issued a statement to the effect that the Federal Open Market Committee "will gradually and predictably reduce the Federal Reserve's securities holdings by decreasing the reinvestment of principal payments from securities held in the System Open Market Account .... " The Fed will begin shrinking its portfolio in October, initially by allowing US$6 billion of Treasurys and US$4 billion of mortgage-backed securities to mature every month without reinvesting the principal, The Wall Street Journal explained. "This should push up long-term interest rates somewhat, resulting in a steeper yield curve that will help bank profitability. This effect will be limited by the fact that foreign central banks are still actively buying bonds and other securities, holding down long-term rates around the world," the WSJ noted. Now, as the Fed's assets mature and aren't replaced, the associated liabilities also will roll off its balance sheet, meaning banks' excess reserves will start to fall.  "With those reserves now falling, banks may need to buy paper, such as Treasurys or mortgage backed securities to stay in compliance with the high quality liquid assets rules. This will ripple through markets, potentially reducing the impact of the Fed's unwinding on long-term rates," the WSJ reports. This effect won't be felt immediately because banks currently have liquid assets well above the regulatory minimums. Banks eventually will earn more from these new assets than from deposits with the Fed, though, which currently pay just 1.25 per cent.  Over time this could become a significant income boost to some lenders. Nomura Instinet analyst Steven Chubak was quoted in the WSJ as estimating that JP Morgan Chase will be the biggest beneficiary, potentially seeing a four per cent boost to 2018 earnings per share.