The Fed is finally on a path to winding down its nine-year stimulus program.
After its two-day policy meeting, the Federal Reserve raised its benchmark interest rate, the third time in six months, stuck to its forecast of one more hike this year and laid out plans to unwind its balance sheet.
The Federal Open Market Committee (FOMC) voted to raise the range of the federal funds rate to 1.00% and 1.25%, citing mixed economic data.
“In view of realized and expected labor market conditions and inflation, the Committee decided to raise…the fed funds rate,” the central bank wrote in its statement.
One member of the committee, Minneapolis Fed President Neel Kashkari, voted against the decision, preferring to keep the federal funds rate between 0.75% and 1.00%. In March, Kashkari was also the lone dissenter to raising rates.
Unwinding the balance sheet
The Fed also described its plans to wind down its $4.5 trillion balance sheet, which it expects to begin this year. The program, in which the Fed would gradually reduce its holdings of Treasuries and agency securities, will decrease the Fed’s reinvestment of principal payments. Payments will only be reinvested when they exceed gradually rising caps, which start out at $6 billion per month for Treasuries and $4 billion per month for agency debt and MBS.
“The Committee currently anticipates reducing the quantity of supply of reserve balances, over time, to a level appreciably below that seen in recent years but larger than before the financial crisis; the level will reflect the banking system’s demand for reserve balances,” the Fed wrote in an addendum to its statement. The unprecedented size of the Fed’s balance sheet is a lingering a result of the extraordinary easing measures it took in response to the financial crisis.