Consider the Federal Reserve the Starship Enterprise of monetary policy: It went where no central bank had gone before, and now must plot the journey home.
The Fed already has begun one leg of the trip, as it has started raising interest rates from financial crisis-era lows. Now, it is preparing to embark on what could be the more perilous part — unwinding the $4.5 trillion of bonds it holds on its so-called balance sheet.
Central bank officials discussed in March how to address the balance sheet, according to minutes of the Federal Open Market Committee released Wednesday. While it may just sound like arcane monetary talk, the stakes are high both for investors and consumers.
Get it right, and the Fed will have pulled off what its critics thought impossible, namely embarking on unprecedented intervention in the markets with little consequence. Get it wrong and the fallout could be dramatic, including a sharp rise in interest rates and tumult in the stock and bond markets.