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Michelle Holmes

September 25 , 2017

Balance Sheet Reduction

Balance Sheet ReductionThe Federal Reserve Open Market Committee (FOMC) met last week to discuss the state of the economy and decide on the direction of short-term interest rates. As expected the FOMC left short-term rates unchanged. It did announce the start of the balance sheet reduction plan announced earlier this year.

During the financial crisis, the FOMC lowered short-term interest rates to spur economic growth. The economy did not recover as expected, so the FOMC began flooding the financial system with cash by purchasing U.S. treasuries, agencies and mortgaged-backed securities. It continued this process from 2009 until 2014, increasing its balance sheet to over $4 trillion. Since that time, the Federal Reserve has reinvested the proceeds from bonds that mature or pay down each month. This process kept the balance sheet holdings at the same level.

Balance Sheet Reduction

Source: www.fred.stlouisfed.org 

The balance sheet reduction plan will allow some of the maturing bonds and pay downs to roll off the balance sheet. In other words, the Fed will not reinvest all of the proceeds it receives each month. The Federal Reserve will start in October and allow $6 billion a month to roll off. It plans to increase the quantity allowed to mature/pay down each quarter until it reaches $30 billion per month.

The FOMC plans to continue its gradual pace of short-term interest rate hikes. The projections of the FOMC members of future federal funds rates indicate the committee still believes it can raise interest rates one more time in 2017. The interesting note was in the press conference. Chairwoman Yellen indicated the FOMC could change course if the factors causing inflation to run below estimates “are likely to prove persistent”.  Inflation running below expectations has been a recurring theme for almost a decade now; that certainly appears persistent to us.

If you want to know how this or other news items that may affect your portfolio, contact the Security National Bank Wealth Management team today.

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