Back in mid-March, the Federal Reserve raised the U.S. official interest rate, otherwise known as the federal funds rate, by 0.25%. Although a rise had not really been expected until a couple of weeks before the meeting, when the decision came no one was surprised, as a procession of Fed officials had made it very clear a rate rise was very, very likely.
The minutes of this meeting have now been released and they have raised the spectre of the US Fed finally reversing the massive increase it oversaw in its balance sheet since 2009. Prior to the GFC, the U.S. Fed had around USD$850 billion of assets. As of March 2017, the Fed’s balance sheet was around USD$4500 billion, the result of years of buying US Treasury bonds and mortgage-backed securities.
The Fed would accomplish this reduction not by selling these assets, but by simply letting them mature and not buying any more. These assets are interest-bearing securities and they will be redeemed on their maturity dates. “In particular, participants agreed that reductions in the Federal Reserve’s securities holdings should be gradual and predictable, and accomplished primarily by phasing out reinvestments of principal received from those holdings.” The Fed hopes this path will avoid financial market volatility experienced in the past when discussions of “tapering” had emerged.
There was also confirmation of how the U.S. Fed views the Trump Administrations plans. “…most participants continued to view the prospect of more expansionary fiscal policies as an upside risk to their economic forecasts.” In other words, the “participants”, otherwise known as senior Fed officials including chair Janet Yellen, acknowledge their forecasts for economic growth and inflation may be on the conservative side and in need of adjustment.