Fed likely to pare its bond portfolio, even with uncertainty

WASHINGTON» When the Federal Reserve meets this week, it’s sure to take account of the economic consequences of two devastating hurricanes.

It will also be awaiting an announcement, possibly within weeks, about its own leadership: whether President Donald Trump will ask Janet Yellen to remain Fed chair beyond February, when her term ends.

Amid the uncertainty, the Fed is considered all but sure to announce after its meeting ends Wednesday that it will begin paring its enormous bond portfolio — a process that’s likely to cause consumer and business loan rates to rise gradually over time.

It is, in a way, a kind of mini rate hike. The Fed’s balance sheet has reached $4.5 trillion — roughly five times its size before the financial crisis erupted in 2008. Its size reflects bond purchases the Fed made after the crisis struck to try to ease long-term borrowing rates, encourage spending and energize an anemic economy. Now, with a far healthier economy, the Fed wants to begin shrinking its portfolio. Doing so, even gradually, will likely make some long-term loans, like mortgages, costlier.

Still, the Fed has telegraphed its move for months, and investors are thought to be well-prepared for it.

“The start to reducing the Fed’s balance sheet is an action the markets are ready for,” said Diane Swonk, chief economist at DS Economics. “The Fed has laid out a roadmap, and there is really a sense of relief to finally get it started.”

In June, the Fed spelled out its plan for shrinking the balance sheet: It would let a small portion of bonds mature each month without being replaced. It would start with reductions of $10 billion a month — $6 billion in Treasurys and $4 billion in mortgage bonds — and raise the amount quarterly until it reached $50 billion a year later.