Fed put a lot of focus on balance sheet issues – BBH

Analysts at BBH explain that some points about the FOMC minutes are worth mentioning, as the Fed put a lot of focus on balance sheet issues.  

Key Quotes

“The Fed seems to favor shrinking the balance sheet this year.  It seems to favor tapering reinvestment rather than stopping abruptly.  The Fed also seems to favor letting maturing bonds roll off, and they will not sell any outright.  It hopes to alert markets “well in advance” of when it starts reducing the balance sheet, presumably to prevent any panicky market reaction.”  

“Many issues still need to be discussed at upcoming meetings.  For instance, some FOMC members want the start of balance sheet reduction to be triggered when the fed funds rate hits a specific level, while others want to make the choice data dependent.  The FOMC also is split on whether to target a time limit for balance sheet reduction or to target a specific balance sheet size.”

“Bottom line:  The Fed wants to act very, very cautiously on the balance sheet issue while at the same time maintaining maximum operational flexibility.  Yet the discussion of balance sheet reduction is another sign of growing confidence in the Fed’s efforts to normalize policy.”