So maybe a map for reading the FOMC minutes is to recognize that the frame in which they are operating, the range of decision-making that the committee itself feels is within its scope, is determined by the surrounding structures: I can see that the U.S. Congress, the U.S. executive, the economics discipline, the primary dealers, and the financial system more generally all serve to give shape to their field of action.

A big piece of so-called normalization, and about getting past the 2008 crisis, is about running off interventions in the mortgage market. Principal payments from MBS holdings are to be reinvested in Treasuries up to a cap of $20bn per month, beyond which they will go to buy more MBS. I want to bring out this line from the FOMC's "Balance sheet normalization principles and plans," released after the March 2019 meeting and available in the minutes to that meeting:

It continues to be the Committee’s view that limited sales of agency MBS might be warranted in the longer run to reduce or eliminate residual holdings. The timing and pace of any sales would be communicated to the public well in advance. [@fomc19b, 4]

Agency MBS could be run down further, and this would be clearly signalled.

In the April–May minutes [-@fomc19c], there is a discussion of policy alternatives as they connect to the maturity makeup of the eventual Fed portfolio (the system open market account, SOMA). If the portfolio is weighted to the short end, then the FOMC could lengthen maturity to ease money-market conditions if needed. But the thing I want to emphasize is that one of the alternatives listed is forward guidance.

In both cases, the FOMC is at pains to communicate, in the former to avoid surprises and the latter because it feels that forward guidance is itself a policy tool. Ans so I am interested in how the surrounding institutions help create those avenues for monetary-policy making, and whether that tells us something about how to understand what the central bank is doing.

References