The Federal Reserve isn’t likely to roil the market when the central bank starts to reduce its $4.5 trillion balance sheet, Vice Chairman Stanley Fischer said Monday.
Fischer, who spoke about monetary policy expectations and surprises, said he drew that conclusion by the muted market reaction to the release of minutes showing the central bank’s balance sheet reduction could start in 2017, even though surveys of primary dealers and market participants expected such a reduction to begin in 2018.
“My tentative conclusion from market responses to the limited amount of discussion of the process of reducing the size of our balance sheet that has taken place so far is that we appear less likely to face major market disturbances now than we did in the case of the taper tantrum,” Fischer said. “But, of course, as we continue to discuss and eventually implement policies to reduce our balance sheet, we will have to continue to monitor market developments and expectations carefully.”
The taper tantrum is a reference to the run-up of nearly 1 percentage point on the yield of the 10-year Treasury in 2013 after then-Chairman Ben Bernanke discussed the tapering of bond purchases for the first time.
After the taper tantrum, the Fed began surveying market participants — today, some 30 buy-side firms — as well as the primary dealers.
Fischer noted that the market participants had more expectations of an early announcement date for the balance-sheet reduction than the primary dealers.
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Fischer also cautioned about reliance on the so-called dot plot, which is the median federal funds rate projection of FOMC participants.
“One may say that the [summary of economic projections] shows the basis from which each participant in the FOMC discussion is likely to start. But the task of moving from that information to an interest-rate decision is not simple and requires a great deal of analysis and back-and-forth among FOMC participants at each meet,” he said.
During a question-and-answer sessions, Fischer dismissed concerns that the Fed was providing too much information and therefore fueling too much trading.
“I don’t think we’re engaged in a game where they are leading by us the nose,” he said.