“Yellen’s Surprise Comments Jolt Bond Market”

You could have knocked me over with a feather! (read “surprise comments” article here)

Who knew?

The Committee intends to gradually reduce the Federal Reserve’s securities holdings by decreasing its reinvestment of the principal payments it receives from the securities held in the System Open Market Account. Specifically, such payments will be reinvested only to the extent that they exceed gradually rising caps. Initially, these caps will be set at relatively low levels to limit the volume of securities that private investors will have to absorb. — Janet Yellen

The unwinding of Quantitative Easing (QE) is to be very gradual, so as to not roil the markets (bond or stock). This is a continuation of the cautious, data-dependent Fed policy that has been in place for years.

Once we start to reduce our reinvestments, our securities holdings will gradually decline, as will the supply of reserve balances in the banking system. The longer-run normal level of reserve balances will depend on a number of as-yet-unknown factors, including the banking system’s future demand for reserves and the Committee’s future decisions about how to implement monetary policy most efficiently and effectively. The Committee currently anticipates reducing the quantity of reserve balances to a level that is appreciably below recent levels but larger than before the financial crisis. — Janet Yellen

Again, the operative word is “gradually” and there is a new, but not surprising element, “reducing … the quantity of reserve balances to a level that is appreciably below recent levels but larger than before the financial crisis.” The economy has grown appreciably over the past 8 years, simply making it necessary for the Fed to keep a larger balance sheet.