US10Y

At their policy meeting in December, FOMC participants agreed to double down on QE pace to close the same by Mar’22 amid growing concerns about hotter inflation. Fed officials also began discussing at the December meeting about balance sheet (bond holdings), and some policymakers are pushing to start shrinking them sooner and faster than they did after an earlier asset-purchase (QE) program after 2007-08 GFC. Markets would see that as a form of tightening monetary policy because it would signal the central bank’s desire to deliberately slow the economy.

Once the Fed stops buying bonds/assets (after QE tapering), it could keep the holdings steady by reinvesting the proceeds of maturing securities into new ones, which should have an economically neutral effect. Alternatively, the Fed could allow its holdings to shrink by allowing bonds to mature, or runoff (QT-Quantitative Tightening).