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Federal Reserve Members Hint at Balance Sheet Reduction

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The central bank at its meeting in December started plans for cutting the bonds it is holding, as its members express regarding reduction in the balance sheet soon after the federal reserve begins raising interest rates, as per the minutes released from the meeting on Wednesday.

The process could start in 2022, most probably in the next few months.

“Almost all participants agreed that it would likely be appropriate to initiate balance sheet runoff at some point after the first increase in the target range for the federal funds rate,” the meeting summary stated.

Market anticipations presently are for the Federal Reserve to begin raising its interest rate in March, and that mean balance sheet reduction will begin before summer.

The minutes from the meeting also showed that once the process begins then the correct speed of balance sheet runoff would be speedier than the last normalization in October 2017.

The size of the central bank’s balance sheet is high since the fed’s bond purchases are key part in keeping interest rates low.

Fed officials said repeatedly during the meeting, “ultra-easy policies instituted in the early days of the Covid-19 pandemic were no longer warranted or justified.”

Kathy Jones, chief fixed income strategist at Charles Schwab said, “The fact that almost all participants agreed that it was appropriate to initiate the balance sheet runoff after the first increase in the target range for the fed funds rate implies that there’s not a big appetite for ‘let’s wait and see’. Last time, they waited two years. This time, it looks like they’re ready to go.”

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