The Federal Reserve concluded its two-day meeting on Wednesday. Investors had anticipated no change in the central bank’s interest rate policy, nor an imminent decision to shrink its $4.5 trillion balance sheet. They were not surprised. The only significant change in the Fed statement was that the process of not investing all the maturing securities would begin “relatively soon.” At the conclusion of its previous meeting on June 14, the Fed had anticipated that such a tapering would occur “this year.”
Markets took the change in statement to mean that the balance sheet reduction, at an initial slow pace of $10 billion per month, could be announced by the Fed as early as its next meeting on September 20, and become effective October 1. While the pace of not investing all maturing securities would be glacial to begin with, it would be a sea change in policy — after all, the Fed’s asset holdings have been a one-way street since the financial crisis, rising from about $800 billion on “Lehman Day” (September 15, 2008) to its current level of $4.5 trillion. The Fed calls the balance sheet reduction process “normalization,” and the move is supposed to mark the beginning of the end of “emergency” measures that the then chairman, Ben Bernanke, introduced as long ago as January 2009. It has indeed been a long emergency period from the Fed’s point of view!