Fed Ready To Shrink Bloated Balance Sheet, Minutes Show

(RTTNews) - The Federal Reserve is ready to start to shrink their bloated $4.5 trillion balance sheet this year, the minutes of the March monetary policy meeting revealed Wednesday.

At the March 14-15 meeting, FOMC members voted at the meeting to raise interest rates a quarter-point while projecting two further rate hikes this year.

There was detailed discussion of ending the reinvestment policy, with policy makers unsure whether to phase out reinvestment of principal payments or cutting them off at once by year's end.

This is seen as a nod to the improving economy and prospect of strong medium-term economic growth.

Provided that the economy continued to perform about as expected, "most participants anticipated that gradual increases in the federal funds rate would continue and judged that a change to the Committee's reinvestment policy would likely be appropriate later this year," the minutes said.

Nearly all participants agreed that the Committee's intentions regarding reinvestment policy should be communicated to the public well in advance of an actual change.

The Fed expressed some concerns that sky-high stock valuations may not be rooted in strong fundamentals.

"A few participants attributed the recent equity price appreciation to expectations for corporate tax cuts or to increased risk tolerance among investors rather than to expectations of stronger economic growth. Some participants viewed equity prices as quite high relative to standard valuation measures," the minutes continued.

However, there was optimism about the economy, especially in terms of the labor market, with the FOMC noting monthly increases in nonfarm payroll employment averaged nearly 210,000 over the three months ending in February, the unemployment rate edged down, and the labor force participation rate ticked up.