Some Federal Reserve officials are ready to talk about what it would take for the central bank to stop the ongoing shrinkage of its massive holdings of cash and bonds, opening the door to a notable shift in central bank monetary policy, according to meeting minutes for the Fed’s Dec. 12-13 policy meeting, released on Wednesday.
At the gathering last month, “several participants remarked that the Committee's balance sheet plans indicated that it would slow and then stop the decline in the size of the balance sheet when reserve balances are somewhat above the level judged consistent with ample reserves,” the minutes said.
“These participants suggested that it would be appropriate for the Committee to begin to discuss the technical factors that would guide a decision to slow the pace of runoff well before such a decision was reached in order to provide appropriate advance notice to the public," the Fed document said.
The policymakers were taking on a process that has complemented the Fed’s aggressive rate hike cycle, and that is its ongoing contraction of just shy of $100 billion per month in the overall size of its balance sheet. The Fed is allowing Treasury and mortgage bonds it owns to mature and not be replaced, and in doing so, it has reduced its balance sheet by just over $1 trillion, to $7.764 trillion on Dec. 27.
The Fed bought bonds aggressively through the start of the coronavirus pandemic to help stabilize financial markets and stimulate growth, causing its balance sheet to surge from $4.3 trillion at the start of March 2020 to a peak of just shy of $9 trillion in the summer of 2022. Taking liquidity back out is part of its process of returning monetary policy to a normal footing.
Fed officials are trying to reduce liquidity to a level that will still allow them to retain firm control over short-term rates, but they have thus far provided little guidance about timetables and desired levels of liquidity.
But with Fed rate hikes almost certainly over and rate cuts on the market’s mind, the minutes show at least some Fed officials are also ready to talk about ending the balance sheet drawdown many refer to as quantitative tightening, or QT. Many in markets have been eying the second or third quarter this year as an end point for the wind down.
