Fed Officials Prepare Balance Sheet Runoff Plan That Caps Reinvestments

Federal Reserve officials at their May 2-3 policy meeting voiced support for a plan to shrink the central bank's roughly $4.5 trillion portfolio of bonds and other assets via a tapering approach this year, according to minutes of the gathering.

While policy makers haven't made a final decision on reducing the large holdings that the central bank built up during the financial crisis, Fed staff briefed officials at the meeting on a proposal to announce a set of gradually increasing caps, or limits, on the dollar amounts of Treasury and agency securities that would be allowed to run off each month.

Officials stopped adding to the balance sheet several years ago but have kept their holdings steady by reinvesting the proceeds from maturing assets.

Under the new plan, caps to limit reinvestments would initially be set at low levels and then be raised every three months over a set period of time. Only the amounts of securities repayments that exceeded the caps would be reinvested each month, according to the plan.

"As the caps increased, reinvestments would decline, and the monthly reductions in the Federal Reserve's securities holdings would become larger," the minutes said.

The final values of the caps would then be maintained until the size of the balance sheet was normalized, the minutes said, without specifying the size of the balance sheet officials considered to be normal.

The approach would be consistent with shrinking the balance sheet in a "gradual and predictable manner," the minutes said.

"Nearly all policymakers expressed a favorable view of this general approach," the minutes said, adding it likely would be appropriate to begin reducing the Fed's holdings this year.

"Limiting the magnitude of the monthly reductions in the Federal Reserve's securities holdings on an ongoing basis could help mitigate the risk of adverse effects on market functioning or outsized effects on interest rates," the minutes said, adding "the approach would also likely be fairly straightforward to communicate."

(END) Dow Jones Newswires

May 24, 2017 14:15 ET (18:15 GMT)