Federal Reserve officials said the shedding of the $4.5 trillion in bonds the central bank is holding on its balance sheet will begin this year.
The revelation came Wednesday from a summary of the Federal Open Market Committee meeting held in March, during which the group approved a quarter-point hike in its benchmark interest rate target. Officials at the meeting noted that the Fed likely is on a faster pace with rate hikes ahead.
Unwinding the balance sheet is significant both because of its sheer size and the impact it could have on markets, as Fed members including Chair Janet Yellen have indicated that the move itself would amount to a rate hike.
"Provided that the economy continued to perform about as expected, most participants anticipated that gradual increases in the federal funds rate would continue and judged that a change to the Committee's reinvestment policy would likely be appropriate later this year," the summary, or minutes, said.
No timetable was mentioned and there wasn't any indication given that the balance sheet was in play when the FOMC released its post-meeting statement.
That may have been because there appears to be little consensus on how the operation will be carried out.
Some members opined that the Fed should wait until the economy hits certain targets before moving — a road the bank has previously been down when it set, then abandoned, goals for unemployment and inflation before raising rates. Others, meanwhile, wanted less certain economic "qualitative" judgments before unwinding the balance sheet.
The Fed amassed most of the bonds it owns during three rounds of "quantitative easing," a monthly bond-buying program aimed at juicing the economy following the financial crisis. The securities are mostly Treasurys and mortgage-backed securities. It has been reinvesting the proceeds from those bonds and rolling them over rather than shrink the balance sheet.
There also appeared to be some dispute about how the Fed should reinvest the proceeds — whether it should stop the reinvestments all at once, or gradually phase them out.
The minutes said the Fed will continue "its deliberations on reinvestment policy during upcoming meetings and would release additional information as it becomes available."
Several Fed officials have said in recent public speeches that balance sheet reduction probably would occur this year. The minutes helped confirm that sentiment.
The minutes also stated that the Fed will do its best to communicate its intentions clearly. The central bank has come under fire in the post-crisis world for sometimes sending mixed messages on its intentions.
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