by Mish

At the very minimum, the Fed long ago could have stopped reinvesting interest.

Instead, the Fed is just now coming to term with a balance sheet strategy.

Federal Reserve officials are zeroing in on a strategy to begin winding down their $4.5 trillion portfolio of mortgage and Treasury securities, possibly later this year, as part of their broader effort to drain reservoirs of stimulus out of the financial system.

Under the emerging strategy, the central bank would raise short-term interest rates two more times in 2017 and then potentially pause rate increases, perhaps late in the year. That would allow Fed officials to start winding down their portfolio of securities in a gradual and measured way to assess how markets handle the moves before resuming additional rate increases in 2018, according to interviews and recent public statements from officials.


The strategy depends on whether the economy keeps performing as expected, and it depends on whether Fed Chairwoman Janet Yellen can build a consensus among policy makers about how to proceed. No decisions have yet been made.

I said years ago that the Fed had no plan, and it’s clear they didn’t, and in fact still don’t.

The market threw a “taper tantrum” in 2013 when the Fed hinted they would gradually reduce the amount of money it was feeding into the economy.

Why the Fed thinks it needs to hike before it stops reinvestment is a mystery. But that at long last appears to be the start of a plan. However, I seriously doubt the Fed hikes twice more this year. Perhaps it believes the Nowcast and not GDPNow. For discussion, please see Discrepancy Between GDPNow and Nowcast is Two Percentage Points Once Again.

Mike “Mish” Shedlock

Balance Sheet Reduction Starts October: Like “Watching Paint Dry”

As expected the Fed will begin balance sheet reduction in October.

Fed is Rethinking Its Balance Sheet Unwind: Expect Lower LT Rates, Higher Gold

The Fed is unlikely to keep its balance sheet reduction plan on target. There are significant consequences.

Fed Balance Sheet Unwinding Expected “Relatively Soon”: Let the Debate Begin

As expected, today’s FOMC meeting came with zero surprises. In addition to its standard boilerplate about inflation, the Fed stated it would begin balance sheet normalization “relatively soon”.

Fed Minutes Show Reliance on Consumer Confidence, Sentiment, Soft Data: Balance Sheet Normalization

Schedule Set (It Won’t Be Met). The Fed released the Minutes of June 13-14 FOMC meeting today.

Fed Lays Out Plan to S L O W L Y Reduce Balance Sheet: How Long Will It Take?

In addition to hiking today, the Fed announced its Plan to Shrink Asset Holdings Beginning This Year.

Financial Engineering Chart of the Day: Fed Balance Sheet vs. S&P 500

I was playing around with some ideas on the St Louis Fed “Fred” database and came up with this.

Market Arithmetic and Balance Sheet Worries: Earnings vs Interest Payments

Junk bonds have been underperforming lately as widely noted. Albert Edwards at Society General also notes the underperformance of companies with poor balance sheet fundamentals.

Internal Feuding Within the ECB Over Tapering: Reflections on Monetary Policy

At the Fed, the debate is over normalization of the balance sheet. The Fed has already finished tapering.

Trump Plans to Slash Spending by $3.6 Trillion, Increase Military Spending, Balance the Budget.

In a budget that provides insight into Trump’s thinking but is highly unlikely to make it through Congress, Trump Seeks to Slash $3.6 Trillion of Government Spending in Budget.