Fed Minutes Recap: Halting Balance Sheet Reduction, Risks And Uncertainties

The central bank’s minutes showed that officials discussed ending the reduction in the central bank’s balance sheets before the end of this year.

The minutes showed that there were extensive discussions by officials about the market conditions. Also, there is an emphasis on the central bank’s actions on the markets including equities and bonds.

“Almost all participants thought that it would be desirable to announce before too long, a plan to stop reducing the Federal Reserve’s asset holdings later this year,” the minutes showed about halting the reduction in the balance sheets.

Fed Balance Sheet

Members thought that communicating this to the markets would bring about more certainty about the Fed’s balance sheet reduction and normalization.

Besides tightening monetary policy, the Federal Reserve has also been unwinding its massive asset purchases made under the guide one QE purchases, leading to over $3.8 trillion in bonds that were purchased by the central bank.

The Fed started to reduce its balance sheet in October 2017 as it allowed the level of proceeds to roll off every month. The central bank said that this process would continue seamlessly.

Members noted that the balance sheet reduction was one of the reasons for the market volatility in late 2018. However, in a survey of primary market dealers and market makers, the results showed that the balance sheet reduction was not responsible for the market volatility last year.

The outcome

The markets, on the other hand, reacted to the Fed continuing to reduce its balance sheet despite tightening financial conditions. The statement from the Fed’s minutes showed concerns from other members about the intentions to maintain its balance sheet reduction program to a level that officials were more comfortable with.

The central bank also maintained its stance on interest rates noting that it would remain patient in hiding interest rates. It said that the rate hikes were essential as officials weigh the headwinds to growth.

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