May’s FOMC minutes were released at 2:00 eastern today and included the same self-confidence about the strength of the economy, the progress on inflation, and the good employment numbers. Any sign of weakness, especially in the GDP numbers were waved away as being “transitory.”
Besides these things being used as justification for further rate hikes, we also received more detail about their balance sheet plans. In short, so as not to scare the markets, they are aiming merely to taper back on the dollar amount of reinvestment of the maturing debt. That is, rather than selling their debt holdings to shrink the balance sheet back to normal levels (which are not actually going to be at “normal” levels), they are going to start by halting their reinvestment program. However, before quitting cold turkey on the reinvestments, it appears that they are aiming to agree on a certain dollar amount of holdings that will be allowed to run off.
The WSJ summarizes:
They want to avoid a rerun of the 2013 “taper tantrum,” when investor concerns over the Fed’s decision to slow the pace of those asset purchases roiled markets, leading to a large spike in Treasury yields and capital outflows from emerging-market economies.
Under the emerging scenario Fed officials have outlined in public speeches and interviews, the central bank would raise short-term interest rates two more times this year and then pause rate increases later in the year when they announce plans to set their balance-sheet wind-down into motion. A pause would allow the Fed to watch for any ill effects before resuming rate increases in 2018.
