At the Federal Reserve's December meeting, it was decided that the Fed would begin to cut the amount of bonds it held, with members saying that a reduction in the balance sheet likely would start after the central bank started raising interest rates.
According to statements from the meeting, the process of rolling off the $8.3 trillion in bonds could begin in the next few months.
After the first increase in the target range for the federal funds rate, almost all participants agreed that it would be appropriate to initiate balance sheet runoff.
The Fed is expected to raise its benchmark interest rate in March.
The minutes indicated that the appropriate pace of balance sheet runoff would likely be faster than it was during the previous normalization episode.
The Fed allowed a capped amount of proceeds from the bonds it holds to roll off each month. The Fed started by allowing $10 billion of Treasurys and mortgage-backed securities each quarter to roll off, increasing by that much each month until the caps reached $50 billion.
The program was intended to get the balance sheet down but was short-circuited by the global economic weakness in 2019. The reduction is only about $600 billion.
The Fed kept its benchmark interest rate at zero after the December meeting. In addition, officials indicated that there will be at least three quarter-percentage-point increases in 2022, as well as another three hikes in 2023 and two more in the year after that.
The committee decided to speed up the pace of the bond-buying program. The program would end in March, freeing the committee to start hiking rates.
The current fed fund futures market pricing shows a 2-to-1 chance of the first hike coming in March. The next increase would come in June or July, followed by a third move in November or December.
Fed officials said that the reasoning behind the moves was due to inflation that is higher than they had thought. Consumer prices are rising at a faster rate than in the past.
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