Federal Reserve policy makers discussed options for winding down the central bank’s balance sheet after a staff presentation at their July 28-29 meeting, according to minutes released Wednesday in Washington.
“Most participants expressed a preference that the timing of the cessation of reinvestments be based on a qualitative assessment of economic conditions and the outlook,” the minutes said.
The policy-setting Federal Open Market Committee must decide whether to reinvest $216 billion of proceeds from maturing Treasury securities in 2016, or shrink its balance sheet by allowing the debt to expire. By not reinvesting, the Fed would increase the supply of securities available to investors and put upward pressure on yields.
Shrinking the $4.2 trillion portfolio will add to the monetary tightening from increases in the benchmark interest rate officials envision for this year. That would mark a reversal of the easing the Fed achieved when it bought bonds in three rounds of so-called quantitative easing to speed a recovery from the worst recession since the 1930s.
The staff presentation presented strategies including tying the decision on reinvestments to numerical or qualitative assessments of economic conditions or basing it on the timing of the first rate increase, according to the minutes. The staff also noted the FOMC could phase out reinvestments gradually or end them all at once.
“No decisions regarding the Committee’s strategy for ceasing or phasing out reinvestments were made at this meeting,” the minutes said. “Participants requested additional analysis from the staff related to alternative approaches to halting or phasing out reinvestments, including consideration of the possible market effects, and agreed that it would be helpful to continue to discuss these issues at upcoming meetings.”