Traders Bet the Fed Will Slow Rate Hikes to Shrink Balance Sheet
- March minutes signal balance sheet reductions to start in 2017
- Investors unsure whether Fed can hold three-hike plan for 2018
Most Federal Reserve officials agree that they will begin shrinking their super-sized balance sheet later this year. What they don’t want to discuss in detail yet is how that will shape their plans to continue raising the short-term interest rate in 2018.
The minutes of the March meeting employed some key words to outline plans to trim the balance sheet, which ballooned to $4.5 trillion following three rounds of bond purchases. Reductions need to be “gradual and predictable,” and should be accomplished by “phasing out” of reinvestments, meaning the central bank wouldn’t abruptly stop repurchasing all debt instruments when they mature. Finally, policy makers indicated reductions would start “later this year,” although they didn’t provide details on amounts.