US Fed minutes reveal slice in treasury securities from the balance sheet runoff
Federal Reserve is preparing in short order to slow the rate at which it sheds Treasury securities from its balance sheet, with policymakers generally favoring cutting the recent pace by roughly half in an effort to extend the process of shrinking holdings and reducing the risk of market trouble. According to minutes released on Wednesday of the Fed's latest policy meeting, held on March 19-20, officials are thinking about the future of their balance sheet winddown, known as quantitative tightening, or QT, with an eye toward the 2017 to 2019 period, when they last engaged in a similar process that ended up with significant market tumult.
Due to that experience, officials last month “broadly assessed it would be appropriate to take a cautious approach," and "the vast majority of participants thus judged it would be prudent to begin slowing the pace of runoff fairly soon." The Fed is currently allowing up to $60 billion per month in Treasury bonds and up to $35 billion per month in mortgage bonds to mature and not be replaced as part of the QT agenda. “Participants generally favored reducing the monthly pace of runoff by roughly half from the recent overall pace," the minutes said, and officials aim to do this by tweaking the runoff of Treasuries and leaving in place the cap on mortgage bond runoff.
For a variety of reasons, the Fed has struggled to see mortgages run off at the desired pace. And as it ultimately wants as close to an all-Treasuries securities portfolio as it can get, it's government securities that will see the biggest effect in the looming taper.
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