Economist's Insights

FOMC Minutes Pave Way for June Hike, 2H17 Balance Sheet Adjustments

May 24, 2017

The Minutes from the FOMC’s May 2-3 meeting, as expected, appear to set the stage for a June hike.  The Minutes note that “Most participants judged that if economic information came in about in line with their expectations, it would soon be appropriate for the Committee to take another step in removing some policy accommodation.”  This phrasing is consistent with previous communications leading up to a rate hike.  As for the weaker-than-expected inflation report from March, the Minutes show that most participants expect this to be transitory.  “Although the data on aggregate spending and inflation received over the intermeeting period were, on balance, weaker than participants expected, they generally saw the outlook for the economy and inflation as little changed.”  However, the April inflation data, released after the May meeting was held, was again weaker-than-expected.  Nonetheless, there remains a high likelihood of a June 14 rate hike absent market-jarring news out of Washington, and/or shockingly weak ISM and labor reports for the month of May.

Perhaps the most insightful news in the Minutes was related to the SOMA portfolio.  According to the Minutes, “Nearly all policymakers indicated that as long as the economy and the path of the federal funds rate evolved as currently expected, it likely would be appropriate to begin reducing the Federal Reserve’s securities holdings this year.” Additionally, “nearly all policymakers expressed a favorable view” of a plan which would call for the following:

1) Monthly caps on the amount of the portfolio allowed to run off

2) Any cashflow in excess of the monthly caps would be reinvested

3) Quarterly adjustments to the caps

4) Low caps initially

5) A final cap that would be maintained until the balance sheet is normalized

Not included in the balance sheet normalization plan are any references to the outright sale of securities.