Fed Meeting Minutes From June 2017

In June the FOMC raised their short term interest rates by a 0.25% as the market predicted.  We now have the minutes from that meeting and it appears that several members are eager to announce a balance sheet reduction within the next couple of months.  A bit surprisingly committee members showed little concern over the softening inflation numbers and most believe it was temporary as the economy moves to their target of 2.00% inflation.  There was also some concern about the effects Fed action on the financial markets.

The release of the minutes pushed the market to the best levels of the day as mortgage rates still remain above their best levels seen in mid June.  It’s difficult to determine exactly why the market improved after the release of the minutes and even if it was the exact cause.  As mentioned previously a big part of the meeting minutes was about a balance sheet reduction; more specifically a reduction in the reinvestment program that is currently in place. The Fed currently reinvests their proceeds back into the market however they are planning to change that.  Under a new plan the Fed will begin reducing that by $10 billion every quarter with a goal of eventually getting to $50 billion a month. They are targeting a balance sheet of $2.00 trillion to $2.5 trillion.  The Reinvestment Policy is a major piece of Fed policy and most likely will be reviewed at most meetings in the coming years.  Many people attribute the program with creating an environment in which we saw the best mortgage rates the country has seen in a very long time so it’s important to keep an eye as the program evolves over the next few years.

From the Fed Meeting Minutes:

System Open Market Account Reinvestment Policy The Chair observed that, starting with the March 2017 FOMC meeting, Committee participants had been discussing approaches to reducing the Federal Reserve’s securities holdings in a gradual and predictable manner. She noted that participants appeared to have reached a consensus on an approach that involved specifying caps on the monthly amount of principal payments from securities holdings that would not be reinvested; these caps would rise over the period of a year, after which they would remain constant. Given this consensus, the Chair proposed that participants approve the plan and that it be published as an addendum to the Committee’s Policy Normalization Principles and Plans; the addendum would be released at the conclusion of this meeting so as to inform the public well in advance of implementing the reinvestment policy. It was anticipated that when the Committee determined that economic conditions warranted implementation of the program, that step would be communicated through the Committee’s post meeting statement. Participants unanimously supported the proposal.