Federal Reserve lays out plan to shrink its balance sheet

Yahoo Finance's Brian Cheung breaks down the Fed minutes detailing interest rate hike schedules, balance sheet restructuring, and quantitative tightening.

Video Transcript

DAVE BRIGGS: Brian Cheung covers the Fed for us. He's also got the latest on the plans to reduce the balance sheet. Brian, what do the Fed minutes tell us? What does it mean for down the road?

BRIAN CHEUNG: Yeah, well, as you mentioned, one big headline was that Fed officials were this close to initiating a double bump in interest rate increases. That would have been 0.5%, but instead, they went with the 0.25% in that meeting on March 16. That was because of the developments out of the Russia-Ukraine conflict. But we did get minutes detailing the deliberations in that meeting about six weeks ago.

And we should note that there was a lot of interesting discussion over how the Fed should be addressing its $9 trillion balance sheet. So what we want to look at here is the massive amount of holdings that the Fed amassed since the pandemic began, again, the Fed adding over $4 trillion in US treasuries and agency mortgage backed securities.

So as the Fed sees inflation as a worry, one tool that it has is paring back its balance sheet by allowing a lot of those securities to roll off. So we got some detail about how the Fed might actually do that. The details of the plan would be as follows. $60 billion would be the cap on a monthly basis for US Treasury securities and then $35 billion a month for agency mortgage backed securities. Again, the two major types of assets that it absorbed since the beginning of 2020.

Now they would phase this in over a possible three-month timeline, although the Fed could adjust that process. And it's important to note that no decision on this was made quite yet. The Fed's next meeting is going to be in the first week of May, where they could formalize and begin this process. But if all of that sounds like absolute foreign speak to you, that's because the Federal Reserve's balance sheet program is certainly one of the more complex tools.

All you need to know is that as the Fed unwinds this process, the central bankers hope that this will have the process and added effect of continuing to show markets that the Fed is trying to pull the punch bowl, and that the support will no longer be needed, especially with inflation at highs we haven't seen since the early 1980s, guys.