The Federal Open Markets Committee released minutes from its March meeting, which showed the Federal Reserve is talking about shrinking its balance sheet.
Now, the FOMC minutes show that raising the federal funds rate isn’t the only thing on the committee’s agenda. Members brought up the balance sheet in the meeting, saying they may begin to shrink it.
“In particular, participants agreed that reductions in the Federal Reserve’s securities holdings should be gradual and predictable, and accomplished primarily by phasing out reinvestments of principal received from those holdings,” the minutes stated.
Members of the committee agreed
Provided that the economy continues to perform as expected, most participants anticipated that gradual increases in the federal funds rate would continue and judged that a change to the committee’s reinvestment policy would likely be appropriate later this year.
As long as economic conditions continue to improve, the Fed expressed it may change its reinvestment policy later this year. This time period is much sooner than the market was expecting.
“Nothing is set in stone yet, but this process of changing the reinvestment policy is likely to begin later this year, which is perhaps a little sooner than most in the markets were anticipating,” Capital Economics Chief Economist Paul Ashworth said.
However, there was little indication on how the Fed will approach this change, either all at once or slowly.
“The Fed hasn't decided whether it will cease the reinvestment policy in one fell swoop or cushion the blow by phasing out reinvestment more gradually,” Ashworth said. “Either way, the policy change will be signaled well in advance.”
“The Fed will probably amend the reinvestment policy on both its Treasury and MBS holdings at the same time,” he said. “There was no indication in these minutes of what the ultimately desired size of the Fed's balance sheet might be, although when a plan is eventually published, that info could be included.”
Capital Economics predicts December as the most likely meeting for the introduction of the new policy to occur, and that the federal funds rate will rest between 1.5% and 1.75% by that time.