The Fine Print in the FOMC Docs That You Probably Weren’t Aware Of

Along with yesterday’s announcement on interest rate policy, the Federal Open Market Committee also released “Policy Normalization Principles and Plans.”  Most of the handful of paragraphs is simply describing in more details principles that the FOMC has either stated or alluded to previously: criteria for when and then how they will look to normalize monetary policy and their balance sheet.   What stood out to me was this, which may have been mentioned in the past, but I haven’t heard a lot of chatter about it (emphasis mine):

“The Committee intends to reduce the Federal Reserve’s securities holdings in a gradual and predictable manner primarily by ceasing to reinvest repayments of principal on securities held in the SOMA.

  • The Committee expects to cease or commence phasing out reinvestments after it begins increasing the target range for the federal funds rate; the timing will depend on how economic and financial conditions and the economic outlook evolve.

  • The Committee currently does not anticipate selling agency mortgage-backed securities as part of the normalization process, although limited sales might be warranted in the longer run to reduce or eliminate residual holdings. The timing and pace of any sales would be communicated to the public in advance.

In English:  they’re not going to sell the bonds they own (at least the mortgage backed security portion) – instead they’ll (eventually) let them “roll off” the balance sheet as they mature.

Does this mean you should run screaming for the hills?  No – I just found it interesting, as it’s essentially saying that the Fed will not simply reverse Q.E. (sell the bonds they own) when they normalize monetary policy.


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