Views on the appropriate timing of a change in reinvestment policy ranged from sometime this year to early 2018. Participants generally expressed views more consistent with the “later this year” timing suggested in the March FOMC minutes. Williams said it makes sense for balance sheet normalization to begin toward the end of the year, with an announcement in advance. He saw normalization as taking five years. Dudley also saw late 2017 or early 2018 as the possible timing and emphasized that the normalization of the balance sheet would give the FOMC the liberty to expand it later if needed, although he noted that the balance sheet was unlikely to be as small as its pre-crisis size. He also expected changes in reinvestment to be tapered rather than abrupt. Harker had the same views as Dudley on phasing out reinvestment gradually as well as the appropriate timing. On the other hand, Bullard argued that normalization of the balance sheet should begin now, because he thought the economy doesn’t “have that much further to go on rates…therefore the next step that would be natural would be to allow the runoff in the balance sheet.” However, he understood that an immediate change would be impractical: “I think it could happen this year. It’s probably unrealistic to start right now. But I think with a little more preparation and some deliberation by the Committee, we could get going this year.”
Participants continued to disagree on whether the treatment of MBS reinvestments should be different than for Treasuries, despite agreement on the intention to return to an all-Treasuries portfolio. While the minutes suggested that the FOMC would like to cease reinvestments of both Treasury securities and agency MBS, a couple of FOMC participants shared the view that emphasizing MBS runoff would speed the return of the portfolio to an all-Treasuries state. For instance, Harker noted that “I would rather see us be much more heavily weighted on Treasuries than MBS…I’m not necessarily convinced yet that we should completely get out of MBS, but clearly we want a Treasury-heavy portfolio going forward.” Dudley also expressed this view earlier, while Bullard provided arguments suggesting the same.
Dudley has been a proponent of this view: “Presumably at the time that you make the decision on the balance sheet you might want to forgo the decision on short-term rates just to make sure that the balance-sheet decision doesn’t turn out to be a bigger decision than you thought you were making. So, I would emphasize the words ‘little pause.’”
In separate news, Lacker resigned from his position as Richmond Fed president. Until his replacement is hired, First Vice President Mark Mullinix will serve as acting president. In our view, Lacker’s resignation is of little consequence for future FOMC policy, as his views had generally been outside the consensus. The Richmond Fed will not have a voting member of the FOMC until next year. At this point, we expect the Richmond Fed’s representative at FOMC meetings to maintain a hawkish orientation.