Debate within the FOMC about balance sheet normalization is underway - GS

In its weekend research note to its clients, Goldman Sachs on the Fed looking soon to normalize its balance sheet, i.e., reduce the government & mortgage-backed securities it holds.

Key Quotes:

“The debate within the FOMC about balance sheet normalization is underway”

“Fed officials have two basic choices - they can rely exclusively on the funds rate for now and leave balance sheet decisions to the new leadership team in 2018, or they can combine ongoing funds rate hikes with a turn to balance sheet runoff later this year”

“Case for early balance sheet normalization is based on the upcoming Fed leadership transition”

“If the new appointments are thought to favor aggressive balance sheet normalization, perhaps even including asset sales ... financial markets might experience heightened uncertainty during the transition”

“The current FOMC could reduce that uncertainty by establishing an early "baseline" path for very gradual balance sheet rundown”

“Committee decisions are subject to change, of course, but markets would probably take comfort from the fact that most FOMC members will remain in their positions and that it is harder for the new leadership to radically change a policy that is already in place than to devise a new one”

“We therefore expect the committee to announce gradual tapering of reinvestments in December 2017, while holding the funds rate unchanged at that meeting”