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Comment: Fed will start to “slow the pace of the decline in reserves” starting in May and ending in September

After indicating that the Fed would “soon” announce its plans regarding the beginning of the end of balance sheet normalization, the FOMC was ready to do so out of the March 19-20 FOMC meeting. It issued a “Balance Sheet Normalization Principles and Plans“. The main points were:

  • Beginning in May 2019, cap on monthly redemptions of Treasurys down to $15 billion from $30 billion. Reductions in SOMA holdings in September 2019.
  • Agency MBS to continue to decline until September, beginning in October 2019 “principal payments received from agency debt and agency MBS will be reinvested in Treasury securities subject to a maximum amount of $20 billion per month; any principal payments in excess of that maximum will continue to be reinvested in agency MBS.” Principal payments below the $20 billion maximum will be in Treasurys across a range of maturities “to roughly match the maturity composition of Treasury securities outstanding.”
  • Limited sales of Agency MBS may be “warranted in the longer run”.
  • In the end, the balance sheet “will likely still be somewhat above the level of reserves necessary to efficiently effectively implement policy.” Likely to remain there for a time as liabilities rise (currency and other) and bring the balance sheet holdings to an appropriate level.

The release of this update to its plans will allow markets to thoroughly examine it and prepare for the changes. Chair Jerome Powell also mentioned that the FOMC will be considering the appropriate “desired maturity” for the Fed’s holdings.

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