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The Federal Reserve said on Wednesday that they will primarily rely on letting bonds disappear from the balance sheet as they mature, rather than selling bonds outright.
This is their plan in shrinking the balance sheet, which will start after they raise interest rates. And in the long term, the Fed intends to hold mostly Treasury securities, reducing its influence on other types of credit.
The Fed's portfolio doubled during the pandemic because the central bank purchased Treasuries and mortgage-backed securities to support markets and the economy. Now, politicians are developing a plan to reduce these holdings, but Fed officials will have to tread carefully.
The Federal Reserve also said that they are likely to raise interest rates in March, adding that the important point is full employment.
EUR/USD fell to yearly lows because of this news.
The combined moves will complete the Fed's shift away from loose monetary policy, which defined the era of the coronavirus pandemic.
Of late, investors are worried that the shrinking yield gap between short-term and long-term Treasury securities could signal trouble to the economy. They generally expect the Fed to raise interest rates at its next meeting on March 15-16.
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