Fed takes balanced approach to trimming U.S. bond holdings

NEW YORK (Reuters) - The U.S. Federal Reserve will reduce its bond holdings evenly across the maturities of Treasury bonds and, on mortgage bonds, it will continue to focus reinvestments on 15- and 30-year securities.

Federal Reserve Chairman Janet Yellen speaks during a news conference after a two-day Federal Open Markets Committee (FOMC) policy meeting, in Washington, U.S., September 20, 2017. REUTERS/Joshua Roberts

The Fed said on Wednesday it would begin the years-long process of trimming its $4.5 trillion in assets, most of them amassed to encourage investment and growth in the wake of the 2007-09 financial crisis and recession.

(For a graphic on the legacy of quantitative easing, see:

The announcement was expected and adhered to a plan published in June that set a series of monthly caps that rise over time. Less certain was whether the U.S. central bank would focus its remaining reinvestments on shorter-dated assets and accelerate the process - a decision it did not appear to make.

In gradually trimming some of the $2.5 trillion in Treasuries it owns, the New York Fed said it would “allocate that rollover amount across the month’s maturity dates in proportion to total maturities” held on each date, the New York Fed said in a separate statement.

That means mid-month and end-of-month maturities would be reinvested evenly, based on the monthly cap. (For the New York Fed statement, see: here)

In trimming some of its $1.8 trillion in mortgage-backed securities (MBS), the New York Fed said it would stick with its current practice and focus reinvestments on fixed-rate 30-year and 15-year agency securities in the so-called To-Be-Announced market. It will make a detailed announcement around the ninth business day of each month.

“Our balance sheet will decline gradually and predictably,” Fed Chair Janet Yellen said in a press conference Wednesday after the policy decision.

According to the well-telegraphed plan, the Fed will start by trimming no more than $10 billion per month from its balance sheet, with that cap rising each quarter for a year, until it hits $50 billion per month.

That should shed nearly $300 billion in bonds over the first 12 months, and nearly $500 billion over the second, according to analysts’ projections. Fed officials have predicted the overall portfolio could shrink to between $2.5 trillion to $3.5 trillion by early next decade, though they have stressed there is no need to decide any time soon.

Reporting by Jonathan Spicer; Additional reporting by Richard Leong; Editing by Jonathan Oatis and Chizu Nomiyama