The Fed has had ample time to reduce its massive $4.5 trillion balance sheet.
At the very minimum, the Fed long ago could have stopped reinvesting interest.
Instead, the Fed is just now coming to term with a balance sheet strategy.
Federal Reserve officials are zeroing in on a strategy to begin winding down their $4.5 trillion portfolio of mortgage and Treasury securities, possibly later this year, as part of their broader effort to drain reservoirs of stimulus out of the financial system.
Under the emerging strategy, the central bank would raise short-term interest rates two more times in 2017 and then potentially pause rate increases, perhaps late in the year. That would allow Fed officials to start winding down their portfolio of securities in a gradual and measured way to assess how markets handle the moves before resuming additional rate increases in 2018, according to interviews and recent public statements from officials.
The strategy depends on whether the economy keeps performing as expected, and it depends on whether Fed Chairwoman Janet Yellen can build a consensus among policy makers about how to proceed. No decisions have yet been made.
I said years ago that the Fed had no plan, and it’s clear they didn’t, and in fact still don’t.
The market threw a “taper tantrum” in 2013 when the Fed hinted they would gradually reduce the amount of money it was feeding into the economy.
Why the Fed thinks it needs to hike before it stops reinvestment is a mystery. But that at long last appears to be the start of a plan. However, I seriously doubt the Fed hikes twice more this year. Perhaps it believes the Nowcast and not GDPNow. For discussion, please see Discrepancy Between GDPNow and Nowcast is Two Percentage Points Once Again.
Mike “Mish” Shedlock