We’re about to find out why the Federal Reserve did its policy U-turn which ripped markets higher

The Fed currently allows up to $50 billion a month in proceeds from Treasurys and mortgage-backed securities to roll off, though it does not regularly hit that number. Anything beyond that would be reinvested.

Since the process began the bond portfolio has shrunk by more than $400 billion. The balance sheet had once stood at $4.5 trillion, the product of three rounds of bond buying — quantitative easing — the Fed instituted to lower long-term rates and pull the economy out of the financial crisis.

Market participants are now wondering how much further the Fed will go. The minutes will be looked at closely, particularly considering that the stock market rallied after the meeting and the perception that the Fed would take a less aggressive approach to tightening.

“The minutes from the two preceding meetings – November and December – included important sections on the balance sheet,” Lewis Alexander, chief economist at Nomura, said in a note. “We believe the corresponding section of the January minutes will confirm the Committee’s plans to end balance sheet normalization by end-2019.”

Several Fed officials have pointed to the end of the year as a likely point for the process to end, but even that remains in flux.

The key in the discussions thus far is the level of reserves at which the banking industry feels comfortable. The decline in the balance sheet corresponds with a lower level of reserves. Currently, banks are holding about $1.64 trillion in reserves, or nearly $1.5 trillion above the required level.

Many Fed watchers think the final level will be somewhere just in excess of $1 trillion, though some see it higher.

“Once we reach $1.1 [trillion] of reserves, the normalization is done,” wrote Jabaz Mathai, head of U.S. rates strategy at Citigroup.