By Michael S. Derby
(Reuters) – The Federal Reserve on Wednesday announced plans to slow the pace of shrinking its balance sheet, after spending much of the first part of the year warning of this change.
The Fed indicated that, starting June 1, it will reduce to $25 billion the maximum limit on Treasury securities that it allows to mature and not be replaced, compared to the current limit of up to $60 billion per month.
The institution left the maximum limit of mortgage-backed securities that it will allow to withdraw from its accounts at $35 billion per month, and will reinvest any excess principal payments on mortgage-backed securities in Treasury bonds.
The measure was announced at the end of the two-day meeting of the Federal Open Market Committee, in which the US central bank left interest rates unchanged.
The reduction in the pace of withdrawals was widely expected, although market participants were unsure whether the reduction in the withdrawal process would occur at this week’s FOMC meeting or the one scheduled for June.
Federal Reserve officials have argued that by moderating the pace of tapering, they reduce the risk of unwanted market disruptions like those that occurred the last time they reduced their balance sheet.
They have also noted that slowing the pace of balance sheet contraction may allow them to further reduce the overall size of their holdings.
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After doubling the size of the balance sheet to about $9 trillion from its pre-pandemic size, the Fed has been allowing some of its holdings of Treasuries and mortgage-backed bonds to expire. This process, begun in the second half of 2022, has reduced the Federal Reserve’s balance sheet to $7.5 trillion.
(Reporting by Michael S. Derby; Editing in Spanish by Aida Peláez-Fernández)
