Fed Reveals Balance Sheet "Normalization" Schedule: Will Reduce Reinvestments By $10BN/Month

Coming in earlier than many expected, the Fed for the first time laid out how it plans to "normalize" its balance sheet which it expects to reduce by trimming reinvestments in TSYs at a rate of $6Bn/month initially, and MBS at $4Bn/month, or a total of $10bn/month, and will increase the reinvestment caps in steps of 10bn at 3 month intervals over 12 months until it reaches a total 50bn per month.

Indicatively this is well below Goldman's expectation of $10bn and $5bn initial caps for TSYs and MBS, as we showed over the weekend.

As its said in the addendum to the materials, “the Committee currently expects to begin implementing a balance sheet normalization program this year, provided that the economy evolves broadly as anticipated” with directions to read a Policy Addendum.

As the Fed further explains, the reinvestment cap will hit TSYs at the tune of $6Bn per month initially, and MBS at $4Bn:

  • for payments of principal that the Federal Reserve receives from maturing Treasury securities, the Committee anticipates that the cap will be USD6bn per month initially and will increase in steps of USD6bn at 3m intervals over 12m until it reaches 30bn per month.
  • For payments of principal that the Federal Reserve receives from its holdings of agency debt and mortgage-backed securities, the Committee anticipates that the cap will be $4 billion per month initially and will increase in steps of $4 billion at three-month intervals over 12 months until it reaches $20 billion per month.

This level of detail provided is the main surprise so far and what traders are most focused on, because as Citi notes, it as moving forward the chances for a balance sheet announcement from December. More questions on how soon implementation would follow.

Commenting on the Fed's unwind schedule, BMO's Ian Lyngen writes that the Fed positions itself for September/December tapering. It notes that the Fed’s reinvestment tapering plan sets up the central bank to begin unwinding its balance sheet at either the September or December meeting. If the Fed reaches the maximum $30b/month cap for Treasuries (with a December start), this means $325b of UST tapering in 2018, amounting to “roughly half of a 25bp rate hike,” BMO says, using recent Fed estimates

Indicatively, this is the significantly higher reinvestment cap schedule that Goldman expected earlier:

Process for phasing out reinvestment: The May minutes signaled that the committee will preannounce a schedule of gradually increasing caps to limit the amounts of securities that can run off in any given month. Our assumption is that that the initial caps are $10 billion a month for UST and $5 billion a month for MBS. The caps would rise each quarter by $10 billion and $5 billion to $40 billion and $20 billion respectively. Caps allow for a gradual runoff and deal with the variability associated with MBS prepayment and the irregular monthly schedule of maturing assets. The caps will remain in place after the phase-in but then only bind in roughly a third of the months for Treasuries until mid-2020 when the balance sheet reaches its projected terminal size.

We will provide further details shortly

For now, the full statement is below:

All participants agreed to augment the Committee's Policy Normalization Principles and Plans by providing the following additional details regarding the approach the FOMC intends to use to reduce the Federal Reserve's holdings of Treasury and agency securities once normalization of the level of the federal funds rate is well under way.


The Committee intends to gradually reduce the Federal Reserve's securities holdings by decreasing its reinvestment of the principal payments it receives from securities held in the System Open Market Account. Specifically, such payments will be reinvested only to the extent that they exceed gradually rising caps.

  • For payments of principal that the Federal Reserve receives from maturing Treasury securities, the Committee anticipates that the cap will be $6 billion per month initially and will increase in steps of $6 billion at three-month intervals over 12 months until it reaches $30 billion per month.
  • For payments of principal that the Federal Reserve receives from its holdings of agency debt and mortgage-backed securities, the Committee anticipates that the cap will be $4 billion per month initially and will increase in steps of $4 billion at three-month intervals over 12 months until it reaches $20 billion per month.
  • The Committee also anticipates that the caps will remain in place once they reach their respective maximums so that the Federal Reserve's securities holdings will continue to decline in a gradual and predictable manner until the Committee judges that the Federal Reserve is holding no more securities than necessary to implement monetary policy efficiently and effectively.

Gradually reducing the Federal Reserve's securities holdings will result in a declining supply of reserve balances. The Committee currently anticipates reducing the quantity of reserve balances, over time, to a level appreciably below that seen in recent years but larger than before the financial crisis; the level will reflect the banking system's demand for reserve balances and the Committee's decisions about how to implement monetary policy most efficiently and effectively in the future. The Committee expects to learn more about the underlying demand for reserves during the process of balance sheet normalization.


The Committee affirms that changing the target range for the federal funds rate is its primary means of adjusting the stance of monetary policy. However, the Committee would be prepared to resume reinvestment of principal payments received on securities held by the Federal Reserve if a material deterioration in the economic outlook were to warrant a sizable reduction in the Committee's target for the federal funds rate. Moreover, the Committee would be prepared to use its full range of tools, including altering the size and composition of its balance sheet, if future economic conditions were to warrant a more accommodative monetary policy than can be achieved solely by reducing the federal funds rate.


lester1 Wed, 06/14/2017 - 14:44 Permalink

Who the fuck is buying all their toxic assets ??Selling to themselves via PPT ?? Their toxic crap assets are worthless on the open market !!

101 years and … lester1 Wed, 06/14/2017 - 14:45 Permalink

the taxpayers.  unknowingly  by everyone.  the treasury pays interest on treasuries.  the fed remits interest back to treasury.  yet, the amount remitted is ALWAYS substantially lower than what the fed receives from the treasury.  where did those hundreds of billions in US taxpayer funds go?  (losses the Fed incurred from the toxic debt it bought from wall st).

In reply to by lester1

101 years and … Wed, 06/14/2017 - 14:44 Permalink

almost 9 years after bernanke blow-torched the global economy, the Fed might slow down its purchases of bad debt...i mean treasuries.  anyone want to bet there is a correction in stocks (more than 15%) prior to that event to make sure the fed never shrinks its balance sheet?

Overleveraged_… Wed, 06/14/2017 - 14:44 Permalink

10 Billion a month.... LMAO. THAT'S FUCKING PEANUTS. I remain 3x Long Leveraged and am buying this dip currently happening as we speak.S&P 500 will be above 2450 by Friday.

Peacefulwarrior Overleveraged_… Wed, 06/14/2017 - 14:54 Permalink

You are an interesting dude 3X! Keep Banks VERY Liquid, give them a higher term deposit rate, use very attractive reverse repo's to reduce FED balance sheet temporarily and look to kill Dodd Frank. They may be able to do this for awhile as long as debt can be serviced and there isn't anything imminently saying it can't (YET) even if Global Economy is in freefall. And where will all the desperate money flow continue to go? To US Equities.

In reply to by Overleveraged_…

trillion_dolla… Wed, 06/14/2017 - 14:48 Permalink

Within one year of the beginning of the unwind, the Fed expects the economy to magically absorb $600B/yr of additional securities dumped onto the market.Total unadultered lunacy. 

montresor Wed, 06/14/2017 - 15:22 Permalink

What the hell is this, the Fed running a straddle trade? So rather than sell the fraudulent securities on their balance sheet, they're simply declining to reinvest maturing principal? I see. Well now, that's a lovely little backdoor bailout to buy the summer looking to September.. Fucking Pele could not have kicked the can any further..  It's not a path to normalization it's a fucking cash hoard so they can "buy" the fraudulent securities off their balance sheet that can't be sold, and put them right the fuck, back on their balance sheet at a discount to market! Hooray! What a fucking scam.. I've seen a lot of very stupid scammers before, but these guys are pretty good..

Goldenballs Wed, 06/14/2017 - 15:37 Permalink

Obvious stuff you produce shit,which is unsaleable,so you rent a little office in some shithole in Brussels,staff it with immigrants who do not speak English and cannot answer the phone and print off balance sheet more crap to buy your original crap.If it goes wrong your TBTF and you get different shit from the BIS and more shit from the IMF.The more shit you produce the more you have to create and fund the " Market " in Corporate Dollar Manure.

flea Wed, 06/14/2017 - 15:43 Permalink

Nobody understands how the f this works. Purchased bonds come due and are not rolled over. Govt. reimburses principal. Then ... principal returned (minus vig) to Govt.???? Thereby reducing money supply (reducing inflation) and increasing rates (banks lose capital to lend off of?)

International slight of hand. Upper 0.01% laughing all the way ...


GoldenDonuts Wed, 06/14/2017 - 15:50 Permalink

Don't they have about three extra trillion from where they started in 2008?  If yes at that rate it will take them 300 recession free months to bring it down close to where they were.   That is 25 recession free years.  Who is going to buy this crap?   But as long as the great masses of unwashed cannot do arithmetic and continue watching cat videos on their dumbphone these people are wearing teflon suits.

S Spade Wed, 06/14/2017 - 16:31 Permalink

I'm confused, does this mean they're going to decrease the amount of funny money entering the system, or does it mean they're going to start pulling their funny money out of the system?  They're only adding to problem unless they quit devaluing our currency, pretending their "worthless" additions equate to earned value.

pitz Wed, 06/14/2017 - 16:32 Permalink

The whole idea of calling a US Treasury bond an 'investment' is rather misleading/disingenouous/insulting of one's intelligence.  Always upsets me to hear anyone talk of "re-investment" as though there actually was investment in the first place. 

Ned Zeppelin Wed, 06/14/2017 - 18:36 Permalink

Remember, TSYs are not investments. They are the lowest risk storage container for fiat currency. At the very apex of the pyramid of stuff. Think of them as really super protective Tupperware. Backed, not so much by full faith and credit of the USA, but rather by the formidable military hardware of the Empire. House always wins.