The January meeting addressed these concerns in a rare supplementary statement, saying: Market participants have looked for commentary from the FOMC about the balance sheet in previous meetings to no avail. Regardless of the path, holdings are expected to be larger than in the pre-crisis world. The chart below shows the expected size of Fed holdings, based on survey responses of primary dealers and market participants. In the past, the Fed has indicated that excess reserves in a post-crisis environment will be significantly higher than prior to the Global Financial Crisis, but the ultimate level of reserves is anyone’s guess. Maturing securities above the cap are reinvested.ĭespite the inherently transparent nature of the balance sheet reduction, the Fed’s plans for the terminal level of the balance sheet has been no small source of consternation for market participants. Redemptions below the cap (below the grey line) are rolled off and therefore shrink the size of the balance sheet.

The following chart shows the ratio of projected security reinvestments to redemptions if balance sheet reduction plans continue unaltered. With the Fed judging economic and financial conditions as appropriate for rate normalization, maturing securities under a cap have been allowed to roll off the balance sheet since October 2017. The Fed has since begun to reduce its holdings of Treasuries and Mortgage Backed Securities at a gradual pace, as seen in the chart below. Recall that as part of the Fed’s crisis-fighting toolkit, the Fed undertook a massive expansion of its balance sheet (dubbed Quantitative Easing) in the post-crisis years. Market participants also welcomed guidance on the FOMC’s plans for future balance sheet normalization.

The deep breath before the plunge