The Federal Reserve is getting ready to “normalize” the size of its $4.5 trillion balance sheet.
A lot is at stake. Simply maintaining that over-sized stack of bonds makes the Fed a big player in the markets for Treasury and mortgage-backed securities. Investors and traders are anxious for information about how the central bank intends to pull back.
“There are so many different parameters by which they could set this process,” said Tom Simons, a senior economist at Jefferies LLC in New York. “There’s a wide range of market implications as a result for what the public supply of Treasuries is going to be and how liquid the MBS market is going to be.”
What we know so far
At the moment, when a bond in that portfolio matures or gets paid back early, the Fed reinvests the returned principal. To shrink the balance sheet, all the Fed has to do is stop reinvesting.