Economy Watch: Fed to Begin Divesting Balance Sheet

By D.C. Stribling, Contributing Editor

Janet Yellen, Chair of the Board of Governors of the Federal Reserve System (Photo by Paul Morigi)

The central bank is going to start divesting the assets it acquired in the aftermath of the Panic of 2008 to stimulate the economy, according to the Federal Open Market Committee’s recent policy statement. The Fed says believes the economy is now strong enough to sustain such a divestiture.

“The Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, and labor market conditions will strengthen somewhat further,” the Fed noted.

In October, the Committee will initiate the balance sheet normalization program. Currently the Fed has about $4.5 trillion on its balance sheet, up from $858 billion 10 years ago. It will start reducing its holdings by $10 billion in October and then raise that amount gradually in the months to come, up to $50 billion a month next year.

A large share of the central bank’s holdings, about $1.8 trillion, are in mortgage-backed securities, and somewhat more, $2.5 trillion, are in Treasuries. The disposal of these assets will come in the form of “tapering,” that is, not actively selling the securities on the market, but not reinvesting the maturing assets, which is possible because most of them mature within five years. So the action by the Fed will probably not roil mortgage markets the way a more aggressive, direct sell-off might.