FOMC minutes preview: what is Fed’s plan for its balance sheet? - Nomura

Analysts at Nomura noted that the FOMC minutes for the meeting, held on 14-15 March will be released on Wednesday and offered an in-depth preview.

Key Quotes:

"Chair Yellen mentioned at the post-meeting press conference that the decision to raise short-term rates in March “does not represent a reassessment of the economic outlook or of the appropriate course for monetary policy.” 

Consistent with her statement, the FOMC participants’ economic forecasts as well as policy rate projections have not changed materially from their forecasts in the December meeting. 

Over the past two years, the Fed’s plan for rate hikes was hindered by a series of financial shocks at the beginning of each year, such as a plunge in Chinese stock prices, Brexit and a sharp appreciation of USD. 

By contrast, a lack of external shocks so far this year might have made policymakers more confident in their outlook. In this regard, their assessment of risks and uncertainty associated with their economic projections, which will be presented in the minutes, could be interesting. 

One major language change to the post-meeting statement was the inclusion “symmetric inflation goals.” During the press conference, Chair Yellen explained the intention to incorporate this phrase as an indication that 2% target is not a ceiling and allows a shortterm overshooting of inflation goal as long as it is not persistent. Chicago Fed President Charles Evans later said that 2.5% inflation “for a time” would be consistent with the symmetric goal. 

Given that core PCE inflation has been getting closer to 2%, the minutes could provide more information on the degree to which the Fed can tolerate a short-term overshoot of inflation. Last, we could glean some information on the Fed’s plan for its balance sheet. 

At the January meeting, the FOMC participants agreed that they should begin discussions “at upcoming meetings” about the economic conditions that could warrant changes in the existing policy of reinvesting proceeds as well as how those changes would be implemented and communicated. 

At the press conference following the March FOMC meeting, Chair Yellen said the economic conditions that could trigger changes to the balance sheet policy are qualitative rather than quantitative. In other words, the timing of changing the Fed’s reinvestment of maturing securities is a function of not only the level of the policy rate but also the balance of risks and confidence in their economic outlook. That said, several participants expected the Fed to start reducing its balance sheet sometime this year. The minutes may provide important information to measure how far or close we are to the changes to the balance sheet policy."