FOMC minutes - Analysts react
"In our view, the spill-over to Treasury yields from a reduction in the Federal Reserves' balance sheet by phasing out or ceasing reinvestments of the MBS prepayments and/or scheduled repayment of principals should be modest. The potential steepening pressure induced by phased out or ceased reinvestments of maturing Treasuries relies heavily on the Treasury's issuance pattern going forward, but should be moderate compared to the 'taper tantrum' in 2013." - Danske Bank
"To our surprise, the minutes to the March meeting contained extensive discussion on balance sheet policies. We had expected this discussion to take place at the June FOMC meeting, with subsequent deliberations communicated around the timing of the annual Economic Symposium at Jackson Hole in August. However, the committee moved quicker than we anticipated, and staff weighed in with various alternative scenarios during the March meeting. The desire to signal sooner than later is likely a function of the committee’s wish to avoid adverse market reactions. Communicating early – and often – could have been seen as the best remedy to avoid a 2013 'taper tantrum' reaction from markets." - Barclays Research
"One or two Fed officials have indicated that they would like to begin the balance sheet normalisation after a further two rate hikes. Consequently, the December FOMC meeting is probably the most likely date to introduce this change. It's possible that the Fed could temporarily pause its series of rate hikes this year at that December meeting because of the balance sheet policy change. As long as the pre-announcement doesn't trigger any major adverse bond market reaction (i.e. another taper tantrum), however, we're not convinced the Fed needs to be that cautious. We still anticipate an additional three 25bp rate hikes this year, taking the fed funds rate to between 1.50% and 1.75% by year-end." - Capital Economics
"If the Fed clearly communicates its plans, financial markets will adjust to the Fed’s portfolio unwind strategy, and economic performance will actually improve. Note that the minutes showed an unusual discussion of financial asset valuations: "Some participants viewed equity prices as quite high relative to standard valuation measures. It was observed that prices of other risk assets, such as emerging market stocks, high-yield corporate bonds, and commercial real estate, had also risen significantly in recent months." This suggests that the Fed could also be putting its macro prudential 'hat' on in the near-to-medium term and as such, could have more reason to tighten policy at a faster-than-expect pace in coming years. After years of sluggish movement by the Fed, it is finally on the normalization train. Let’s just hope that it’s not too late." - Berenberg Capital Markets