The Fed’s Emerging Balance Sheet Plan

Now that the Fed has tinkered the Fed Funds target range to the upside on a handful of occasions over the last year, they are slowly turning more focus to the Fed’s balance sheet. Before the financial crises, the balance sheet stood below $1 trillion. Now, just 8 years later, it sits above $4.5 trillion. That’s a lot of purchased assets and interest rate manipulations. Since they are claiming to have saved the global economy, it is time to prove it by unwinding all these positions.
Their emerging plan is to complete two more rate hikes this year and then address the balance sheet, likely starting by slowing or halting the reinvestment of their proceeds from their current assets. Of course, they don’t want to go too fast, lest the markets panic. The Wall Street Journal observes:
How it proceeds is of great importance to market participants. In 2013, when the Fed signaled it would stop adding to the portfolio, stocks fell, interest rates rose and emerging stock and bond markets sank – an event known as a ‘taper tantrum’ on Wall Street, driven by investor worries about the implications of a less accommodative Fed.

This post was published at Ludwig von Mises Institute on April 3, 2017.