Beyond confirming that if economic activity continues to unfold as expected another increase in the federal funds rate would be appropriate soon (June), the minutes from the May meeting of the Federal Open Market Committee (FOMC) added relatively little to the picture of the path of monetary policy that was laid out in the post-meeting statement and previous policy discussions.
Cautious optimism about continued moderate economic growth, confidence that inflation would move toward the 2% target, and debate about the remaining level of underutilization in the labor market were the usual suspects rounded up for May’s monetary policy deliberations.
The more attention grabbing feature of the meeting was how previous broad discussion and general principles from the March meeting, regarding reducing the size of the balance sheet, were translated into “a briefing that summarized a possible operational approach to reducing the System’s securities holdings in a gradual and predictable manner.” The minutes from the March meeting referred to a consensus for a change in policy, likely appropriate later this year, and continuing deliberations at upcoming meetings, so the specificity included in the minutes in May was unexpected.
The proposal calls for a set of caps on the dollar amount of Treasury and agency securities that would be allowed to run off each month. Any amount above the cap would be reinvested. The caps would start small and increase over time with the result that reinvestment would decline over time and the balance sheet would shrink. Announcing the schedule for the caps in advance would facilitate reducing the balance sheet in a gradual and predictable manner, avoiding disruption or confusion in financial markets.
The federal funds rate is moving up, balance sheet reduction is in the works, normalization is on the way.