The Federal Reserve pressed ahead with plans to shrink its $4.5 trillion in bond holdings, outlining on Wednesday a very gradual plan for trimming securities that came in at the low end of Wall Street estimates.
In somewhat of a surprise to some observers given a series of weak inflation readings, the U.S. central bank revised its long-standing “policy normalization” plans to show it expects to halt the current reinvestments by ever-larger increments of maturing Treasury- and mortgage-backed bonds.
Policymakers did not specify when they would begin the run-off, though they are aiming for some time later this year. As it stands, the Fed tops up any bonds that mature to keep its balance sheet at a steady level.
The Fed plans to initially allow no more than $6 billion in Treasuries to run off per month, and will raise that “cap” each quarter by $6 billion over 12 months until it reaches $30 billion in maturing bonds per month.
For mortgage bonds, the Fed will start with $4 billion per month and raise it in quarterly steps of $4 billion until it reaches a $20-billion monthly cap.
Wall Street economists had been predicting the cap on Treasuries would be roughly between $5-$15 billion per month, and on mortgage bonds $5-$10 billion, rising by increments of $5-$15 billion, according to research notes.They generally expect the Fed to begin the process at a mid-September policy meeting.
The Fed amassed the record bond holdings in three rounds of so-called quantitative easing meant to stimulate U.S. investment and hiring in the wake of the 2007-2009 financial crisis and recession.
It is the world’s largest holder of U.S. government debt, raising fears that as it steps back from the market yields could shoot higher – though that has not yet happened.
The Fed added that while its main tool for managing monetary policy will remain short-term interest rates, which it raised a notch on Wednesday, it would be prepared to halt its balance sheet reduction or even add more bonds to its portfolio should there be a “material deterioration in the economic outlook.” (Additional reporting by Ann Saphir; Editing by Chizu Nomiyama)