FOMC minutes: a key question that is the elephant in the room - ANZ

Analysts at ANZ explained that the Federal Reserve minutes from the 15 March meeting revealed that committee members favoured kicking off shrinking the balance sheet later this year. 

Key Quotes:

"The key questions around this have been centred around a) timing, b) speed, and c) whether the committee would favour offloading mortgage backed securities first (as holding these is more distortionary) or all types of assets at once. The answers appear to be: later this year after plans are clearly communicated; very cautiously; and all at once."

"The Treasury and equity market response to the move was negligible. Are markets too complacent? Central bank asset purchases and broader largesse has been a key support factor for markets for nearly a decade – indeed, at times the support factor. 

While global economic growth has indeed increased and broadened over the past year, it remains an open question how the global economy will cope with higher interest rates now that global government, corporate and household debt are all much higher than they were pre-GFC – an entirely rational response to record-low interest rates for such a prolonged period. 

Raising the fed funds rate a quarter of a point every now and then is tinkering at the edges compared to the elephant in the room that is the balance sheet. If the Fed stops reinvesting in Treasuries, who steps up to keep prices high and hence yields down? Foreign demand for Treasuries has been waning."