Fed officials keep patting themselves on the back for a huge policy shift - but it hasn't even started yet

Federal Reserve officials may be suffering from a case of premature 'mission accomplished.'

The central bank is going to start gradually reducing the size of its $4.5 trillion balance sheet, which expanded sharply in response to the Great Recession. The bank massively expanded that balance sheet by buying mortgage and Treasury bonds, as a way of helping keep interest rates low.

Fed officials seem to already be taking a victory lap for implementing a reversal of this huge policy shift. In truth, all they've done so far is say that they have plan to announce the plan, probably later this year.

Consider what Jerome Powell, a Fed board governor, said on CNBC on June 1 when he was asked about how big the impact of the Fed's pullback from bond buying would be (emphasis ours):

"You look at this through the eyes of complicated models and they suggest pretty modest effects, so a few basis points here and there," he said. One basis point is a one-hundredth of a percentage point. "So really a better way that I like to look at it is how did the market react to the news that we put out?" Powell continued.

"The market reaction was pretty small on that so that gives me some confidence that there may not be a big market reaction."

A little premature, no? After all, Fed policy has been fairly secondary to market action in recent months as raging geopolitical risks and strong company earnings took center stage. Who's to say markets won't again be obsessing with every Fed move by the time the Fed actually begins the wind-down of bond purchases next year?

Also: the Fed seems to be trying to have its cake and eat it too, arguing that its bond purchases, also known as quantitative easing or QE, were highly powerful when implemented but will make little difference when withdrawn.

Powell himself sounded fairly shaky on the matter when pressed further: "It's pretty hard to predict markets and I try not to do that. Of course if there is a bigger effect than I would expect then that would be taken into consideration in setting rates."

Powell said he expects the Fed's balance sheet will end up much larger than its pre-crisis size of around $800 billion, and will eventually be reduced to around $2.5 trillion to $3 trillion. We're far from knowing if that's true.