The Federal Reserve may begin later this year to shrink a balance sheet that swelled to $4.5 trillion after the financial crisis, using a system of gradually increasing caps to salve concerns about how much liquidity would be pulled from markets each month.
"The caps would initially be set at low levels and then be raised every months, over a set period of time," according to minutes of the central bank's monetary policy committee meeting in early May. The Fed began buying Treasury bonds and mortgage-backed securities by the billions per month to stimulate economic growth after the 2008 crisis froze credit and sent unemployment soaring; its total assets rapidly quadrupled.
Nearly all Fed policymakers "expressed a favorable view of this general approach," according to the minutes, which were published on Wednesday. "Limiting the magnitude of the monthly reductions in the Federal Reserve's securities holdings on an ongoing basis could help mitigate the risk of adverse effects on market functioning or outsized effects on interest rates."
This article was written by a staff member of TheStreet.