The Fed's Balance Sheet Reduction Schedule, In Yellen's Words

Earlier, we laid out how, in theory, the Fed's balance sheet unwind plan will work according to the FOMC: the Fed will trim 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 ($6TSY+$4MBS) at 3 month intervals over 12 months until it reaches a total 50bn per month.

Shortly thereafter Yellen confirmed that the Fed expects to implement a balance sheet reduction plan this year; not just announce it, suggesting either a September or December taper start, unless something "changes" of course.

Here is the explanation, straight from Yellen's mouth, as laid out in the press conference following the Fed announcement:

"Initially, these caps will be set at relatively low levels, $6 billion per month for treasuries and $4 billion per month for agencies. So any proceeds exceeding those amounts would be reinvested. These caps will gradually rise over the course of a year to maximums of $30 billion per month for treasuries and $20 billion per month for agency securities, and will remain in place through the normalization process."

The Fed believes that with this approach to limit the volume of securities, "private investors will have to absorb as we reduced our holdings, the caps should guard against outsize moves in interest rates and other potential market strains."

"I can't tell you what the longer run normal level of reserve balances will be because that will depend on the committee's eventual decisions about how to implement monetary policy most efficiently and effectively in the longer run, as well as a number of as-yet unknown elements, including the banking system's future demand for reserves, and various factors that may affect the daily supply of reserves."

It is worth noting that, in the Q&A, Yellen also said that the Fed's "normalization" plan is contingent on the economy and other factors, so it will most likely change.

In the first question, a reporter asked "The principles you released today say the balance sheet wind down should commence once interest rate normalization is well under way. Would this latest rate increase, with this increase, do you believe normalization is now well under way?"

Yellen answers: "So that is something that we have said for some time, and I've previously, when I've been asked what well under way means, said that I don't want to define that in purely quantitative terms, but rather in qualitative terms. So there is no specific level of the federal funds rate that means we are well under way."

The message: the Fed is not yet ready to signal a specific time this year when implementation might begin.