FOMC minutes were largely scoured for clues about balance sheet normalization – TD Economics

According to Michael Dolega, Senior Economist at TD Economics, given the lack of substantive changes as far as outlook, the FOMC minutes from the mid-March meeting were largely scoured for clues about balance sheet normalization – something we're heard many Fed officials talk about louder in recent months. 

Key Quotes

“Overall, the discussion didn't really alter our views as far as how the Fed will proceed. It appears that both Treasuries and MBS will cease to be reinvested, with some pressure on yields across those markets when as reinvestment timelines are announced. Still, while there is debate amongst the committee, we expect a taper of reinvestments is likely to be employed instead of the one-and-done approach advocated by some. This view is based on the notion that any potential costs of unnerving markets outweigh the any benefits of cutting it off abruptly – still this isn't yet decided and we look forward to more communication in the coming months.”

“Overall, we expect the Fed to hike twice more this year, with 25 basis point hikes likely coming in June and September. Subsequently, the Fed will lay out and implement the beginning of the end of reinvestments. Instead of reinvesting 100%, as it does now, the Fed could reinvest 80%, then 60%, etc. until reinvestments were no more. At that point, the balance sheet would passively begin to shrink, all the more so relative to the growing American economy.”