April 14, 2017

What is the Fed’s next move?

The Federal Reserve has some plans for the coming year. In addition to the possibility of more rate hikes, The Fed is considering a start to unwinding the $4.5 trillion in bonds on the central bank’s balance sheet. In the March meeting of the Federal Open Market Committee, officials stated that the unwind is likely to begin this year, although no details about when or how were addressed.

This is a significant move and somewhat unprecedented; the Federal Reserve has never had to shrink their balance sheet before. The large balance began to accumulate during the Fed’s quantitative easing programs after the 2008 financial crisis, during which the central bank tried to stimulate the economy with large-scale asset purchases. The Fed amassed a large stockpile of bonds and has been rolling them over by reinvesting the proceeds rather than taking them off the balance sheet. The intention to begin the unwinding process signals that we have entered a new chapter in our economic recovery. The process will likely occur very gradually over a number of years.

Following are a few news articles with some behind-the-scenes insights into the Fed’s thinking:

http://www.cnbc.com/2017/04/05/fed-set-to-unwind-balance-sheet-this-year.html

http://www.reuters.com/article/us-usa-fed-policy-idUSKBN1781A0

https://www.usnews.com/opinion/economic-intelligence/articles/2017-04-03/unwinding-the-federal-reserves-balance-sheet-will-be-a-challenge