New York Federal Reserve Building. Photo: Reuters/Keith Bedford
New York Federal Reserve Building. Photo: Reuters/Keith Bedford

The 25 basis point hike in the overnight rate was long expected. The more important question –what the Federal Reserve plans to do with the $4 trillion in securities it bought in years of quantitative easing — has an answer, and it is, “As little as possible.”

The Fed will restrict its balance-sheet reduction in Treasuries to a cap of only $6 billion a month, gradually rising to $20 billion a month if conditions warrant a year from now. In the case of mortgages, reductions in the portfolio will be capped at just $4 billion a month.

That is a glacial pace.

The dollar was up marginally against the Japanese yen and the Euro after this morning’s plunge. The 30-year Treasury bond had been up two full percentage points and is still up 1 7/8 points after the announcement. With its economic growth and inflation forecasts in tatters, the Fed is understandably cautious. At 2:07, the Dow Jones average was up 46 points in a very limited relief rally.

Wall Street chatter is that the Fed’s guidelines for reducing its balance sheet are far more cautious than Wall Street had expected. With total assets of nearly $4.5 trillion, the few billion dollars a month of balance sheet reduction proposed by the Fed staff in today’s announcement will barely make a dent in the Fed’s mountain of securities during the next several years.

From the Fed’s statement after today’s meeting:

“Inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee’s 2 percent objective over the medium term. Near term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely. In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1 to 1-1/4 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.”