Ahead of the release of the FOMC minutes, the discussion has moved from the timing and magnitude of rate hikes to reducing the balance sheet. 
Even doves are on board with moving faster than in the post financial crisis era because inflation and growth are much stronger. Comments from Fed officials imply many options are on the table.
From Oct 2017 to July 2019 the Fed shrunk the balance sheet from 22.9% of GDP to 17.8% by allowing bonds to mature without reinvestment but using “caps” to smooth the process.
At $8.7 trillion the Fed’s balance sheet is currently 38.2% of GDP with a big chunk of treasuries maturing in the next few years and a big chunk of mortgages with long maturities.
For a fast reduction, the Fed could set very high caps or no caps for maturing Treasuries and/or sell MBS. A more methodical approach would be to follow the precedent of 2017-2019 with gradual roll off.
The FOMC minutes will likely only touch on the discussion – but look for comments from Fed officials over the next few weeks for more clarity.
For now any discussion of balance sheet reduction could weigh on risk assets and/or steepen the yield curve as it takes pressure off of rate hikes as sole tool to tighten policy.
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