FOMC: future balance-sheet policy discussed - Nomura

Analysts at Nomura offered a review of the FOMC minutes.

Key Quotes:

"FOMC minutes: In the minutes prepared for the 2-3 May FOMC meeting, the committee reinforced our view that the FOMC will raise short-term interest rates in June if the economy continues to perform in line with the FOMC’s expectations. Incoming data so far have been mixed. Although there has been continued improvement in labor markets, with the unemployment rate ticking down further to 4.4% in April, inflation data were disappointing in March and April."

"However, the minutes indicate that the FOMC members concurred with the view that some of the weakness in March CPI inflation was likely due to transitory factors like wireless telephone services, although this interpretation was made without weaker-than-expected CPI data in April, which became available a week after the May meeting. Nevertheless, the recent low readings in the unemployment rate may counterbalance disappointing inflation data, in our view."

"The minutes also highlighted further discussion of future balance sheet policy. The minutes indicated that the FOMC prefers adjusting the “caps,” or limits, for the dollar amounts of Treasuries and agency MBS that would be allowed to roll off every three months. Further, the committee expected that once the caps reach their “fully-phased-in levels”, the Fed would maintain the caps until the size of the balance sheet was normalized. This indicates that the committee is unlikely to let 100% of maturing US Treasuries and MBS run off, even after the tapering period ends, which should slow the pace of balance sheet normalization."