Fed's message on portfolio trimming: prepare, don't fret
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Loading... - AVA CANDACE
- 01 Feb 2020
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Federal Reserve policymakers are putting markets on notice that the central bank's $4.5 trillion balance sheet is back on the agenda in an apparent effort to give investors time to prepare for changes rather than to signal any action is imminent.
Policymakers want to minimize any volatility that slimming the Fed's massive balance sheet might cause, and have said they will only do so after interest rate increases are "well underway."
The central bank is expected to keep that line in its statement on Wednesday following this year's initial policy meeting and the first one under Donald Trump's administration.
The Fed amassed the bonds during and after the financial crisis to inject cash into the economy and put downward pressure on long-term rates, and has been keeping its portfolio steady since December 2013.
While the Fed has only raised rates twice since the crisis, a number of Fed policymakers are already voicing support for allowing the debt holdings to shrink by letting bonds mature without reinvesting the proceeds.
Some have argued the process, or at least the debate over how to proceed, should begin later this year. Only a few months ago, several voices from within the Fed suggested the balance sheet could remain big for many years to come.
But with labor markets continuing to tighten and Trump promising tax cuts and more spending, inflation and rates may rise faster than last year. Trimming the balance sheet would be the Fed's next step in normalizing monetary policy.
Most Wall Street investors do not expect it until mid-2018, policymakers are playing it safe, keen to avoid a repeat of the 2013 "taper tantrum", when bond yields surged after then-Fed Chair Ben Bernanke hinted at cutting the pace of bond buying.
"They don't want to shock the market," said Robert Tipp, chief investment strategist at Prudential Fixed Income. "They want to prepare the market," he said, commenting on a slew of comments from Dallas Fed's Robert Kaplan, San Francisco Fed's John Williams and Philadelphia Fed's Patrick Harker.
