The consensus view is that the Fed will hike two more times this year (probably in June and September), and then announce a changed to the balance sheet policy at the December FOMC meeting (slow down reinvestment). Merrill Lynch economists think that the Fed will move slower.
A few excerpts from a Merrill Lynch note today: Fed to take a breather
Two more hikes … then balance sheet
Fed officials have been preparing the market for a change to the balance sheet policy. This is consistent with the Fed’s larger communication strategy – slowly hint at policy changes and test the market reaction. … In our view, the Fed is still prioritizing interest rate normalization over the balance sheet. Moreover, we think that the Fed would like to bring rates to at least a range of 1.25 – 1.50% (two more hikes) before shrinking the balance sheet. We believe it is a tall order for the Fed to deliver two more hikes and change the balance sheet policy before yearend, leaving us to argue that balance sheet reduction is a story for early 2018.June is a close call
Our expectation has been for the Fed to skip the June meeting and hike in September and December … our central scenario is as follows. June: the data are not quite strong enough to pull the trigger and the Fed hints at a later date for changing the balance sheet policy. September: the Fed hikes and offers more details on the reinvestment policy. December: another hike and a formal plan for the balance sheet is released. March: they announce the change to balance sheet policy in the statement, effective April [2018]