FOMC Balance Sheet Normalization Principles And Plans - Text>

     WASHINGTON (MNI) - The following is a Federal Reserve note 

regarding balances sheet normalization released Wednesday with the 

statement of the FOMC after its March 19-20 meeting: 

     In light of its discussions at previous meetings and the progress 

in normalizing the size of the Federal Reserve's securities holdings and 

the level of reserves in the banking system, all participants agreed 

that it is appropriate at this time for the Committee to provide 

additional information regarding its plans for the size of its 

securities holdings and the transition to the longer-run operating 

regime. At its January meeting, the Committee stated that it intends to 

continue to implement monetary policy in a regime in which an ample 

supply of reserves ensures that control over the level of the federal 

funds rate and other short-term interest rates is exercised primarily 

through the setting of the Federal Reserve's administered rates and in 

which active management of the supply of reserves is not required. The 

Statement Regarding Monetary Policy Implementation and Balance Sheet 

Normalization released in January as well as the principles and plans 

listed below together revise and replace the Committee's earlier Policy 

Normalization Principles and Plans. 

     To ensure a smooth transition to the longer-run level of reserves 

consistent with efficient and effective policy implementation, the 

Committee intends to slow the pace of the decline in reserves over 

coming quarters provided that the economy and money market conditions 

evolve about as expected. 

     The Committee intends to slow the reduction of its holdings of 

Treasury securities by reducing the cap on monthly redemptions from the 

current level of $30 billion to $15 billion beginning in May 2019. 

     The Committee intends to conclude the reduction of its aggregate 

securities holdings in the System Open Market Account (SOMA) at the end 

of September 2019.  

     The Committee intends to continue to allow its holdings of agency 

debt and agency mortgage-backed securities (MBS) to decline, consistent 

with the aim of holding primarily Treasury securities in the longer run. 

     - Beginning in October 2019, principal payments received from 

agency debt and agency MBS will be reinvested in Treasury securities 

subject to a maximum amount of $20 billion per month; any principal 

payments in excess of that maximum will continue to be reinvested in 

agency MBS. 

     - Principal payments from agency debt and agency MBS below the $20 

billion maximum will initially be invested in Treasury securities across 

a range of maturities to roughly match the maturity composition of 

Treasury securities outstanding; the Committee will revisit this 

reinvestment plan in connection with its deliberations regarding the 

longer-run composition of the SOMA portfolio. 

     - It continues to be the Committee's view that limited sales of 

agency MBS might be warranted in the longer run to reduce or eliminate 

residual holdings. The timing and pace of any sales would be 

communicated to the public well in advance. 

     The average level of reserves after the FOMC has concluded the 

reduction of its aggregate securities holdings at the end of September 

will likely still be somewhat above the level of reserves necessary to 

efficiently and effectively implement monetary policy. 

     - In that case, the Committee currently anticipates that it will 

likely hold the size of the SOMA portfolio roughly constant for a time. 

During such a period, persistent gradual increases in currency and other 

non-reserve liabilities would be accompanied by corresponding gradual 

declines in reserve balances to a level consistent with efficient and 

effective implementation of monetary policy. 

     When the Committee judges that reserve balances have declined to 

this level, the SOMA portfolio will hold no more securities than 

necessary for efficient and effective policy implementation. Once that 

point is reached, the Committee will begin increasing its securities 

holdings to keep pace with trend growth of the Federal Reserve's 

non-reserve liabilities and maintain an appropriate level of reserves in 

the system. 

--MNI Washington Bureau, Tel: +1 202-371-2121; email: dcoffice@marketnews.com

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