Fed’s March Meeting Minutes Point to Gradual Balance-Sheet Reduction

Minutes from the Federal Reserve Open Market Committee (FOMC) March meeting highlight key aspects of the committee’s thinking, including the committee’s intent to reduce its balance sheet gradually over time.

From a big-picture perspective, the FOMC anticipates reducing the reinvestment of its Treasury and mortgage-backed securities holdings later this year in a gradual, predictable way rather than all at once. That timing is consistent with our view, but the market had been split between expecting an early 2018 start and a late 2017 start, so some investors may be surprised.

Other notable content from the minutes:

THE TIMING ISN’T PREDETERMINED, BUT “MOST PARTICIPANTS” IN THE MEETING EXPECT TO START REDUCING THE FED’S BALANCE SHEET LATER THIS YEAR. This is consistent with our view that the fourth quarter is the likely starting point for reducing reinvestment, and it makes sense to us. The committee wants to start reducing reinvestment before the transition to a new Fed chair takes place, which is likely to be in early 2018.

THE COMMITTEE EXPECTS TO PHASE OUT ASSET PURCHASES RATHER THAN STOP ALTOGETHER. It’s not a surprise, but some committee members favor a rapid halt to asset purchases, arguing that this approach would be easier to communicate. Still, that point of view doesn’t appear to be winning the day—most of the committee expects a gradual slowdown rather than a sudden stop.

BALANCE-SHEET REDUCTION SHOULD BE PASSIVE AND PREDICTABLE. The idea is to have the reduction in the Fed’s balance sheet be as much of a nonevent for the market as possible. The committee wants the reduction to be on autopilot unless or until the economic outlook changes, an approach that would be less likely to disrupt markets. It can also be viewed as either easing the transition for a new Fed chair next year or tying the new chair’s hands—depending on your perspective.