The first details of winding down the Fed's $4.5 trillion balance sheet are out with the minutes from the March 14 & 15 FOMC meeting. Most of the policy makers see a change in their reinvestment program sometime this year, one that will include the phasing out of both the Fed's holdings of Treasuries and mortgage-backed securities. Not surprisingly, they hope that shrinking the balance sheet will be gradual and predictable and several of the members wanted a quantitative trigger for ending reinvestment.
The March meeting included the third rate hike of the expansion and nearly all of the 17 members were in support of the move. Nearly all agreed the economy is at or near full employment but nearly all also agreed that they have yet to hit their sustained 2 percent inflation target. With the PCE index at 2.1 percent and the core at 1.75 percent, several said their inflation target will likely be hit this year which could necessitate faster rate hikes.
The outlook for fiscal policy has not been emphasized in the FOMC statements but most say increased government spending could result in greater economic growth. About half the members factored in higher government spending in their economic targets. FOMC statements have been citing strength in consumer confidence which the minutes say could also improve growth provided, however, that it actually translates into higher spending.
Though the end of reinvestment is now in the cards, the minutes do mention that a number of members favor resuming asset purchases should the economy suffer a sharp, unexpected decline. And in a line that may be triggering some selling in the stock market, members noted that stock valuations are "quite high."
Today's minutes outline this year's monetary outlook, one of removing stimulus through rate hikes and also balance sheet unwinding at a time of when the administration and Congress, in contrast, are struggling to add new stimulus measures of their own.