The Federal Reserve at its December meeting began plans to start cutting the amount of bonds it is holding, with members saying that a reduction in the balance sheet likely will start sometime after the central bank begins raising interest rates, according to minutes released Wednesday.
While officials did not make any determination about when the Fed will start rolling off the nearly $8.3 trillion in Treasurys and mortgage-backed securities it is holding, statements out of the meeting indicated that process could begin this year.
“Almost all participants agreed that it would likely be appropriate to initiate balance sheet runoff at some point after the first increase in the target range for the federal funds rate,” the meeting summary stated.
Market expectations currently are for the Fed to start raising its benchmark interest rate in March, which would mean that balance sheet reduction could start before summer.
The minutes also indicated that once the process begins, “the appropriate pace of balance sheet runoff would likely be faster than it was during the previous normalization episode” in 2017.
The size of the Fed’s balance sheet is significant because the central bank’s bond purchases have been considered a key element in keeping interest rates low while boosting financial markets by keeping money flowing.
Wall Street reacted negatively to the news, with stocks falling and government bond yields rising on the prospect of a tighter Fed in 2022.
