Why Shrinking The Fed Balance Sheet May Be Easing

Federal Reserve policy makers have recently started discussing when to start gradually reducing their $4.5tn balance sheet. Minutes of their March meeting suggest “that a change to the Committee's reinvestment policy would likely be appropriate later this year.” This is a subject that the Fed has approached cautiously, out of concern that any decision to shrink the balance sheet would be seen as a tightening of monetary policy. I argue that in fact, unwinding may not be tantamount to tightening.