The Fed says it's open to adjusting its balance-sheet reduction

The Federal Reserve wants to assure you it's not running on autopilot.

Minutes from the December Fed meeting indicate that policymakers are paying close attention to market volatility and concerns about trade disputes forecasts. They are also aware of how tricky it has becoming to raise interest rates and trim the central bank's balance sheet at the same time.

The release of minutes came days after Fed Chairman Jerome Powell said during an appearance at an economic conference that the central bank would be willing to make adjustments to the way it's unwinding its balance sheet.

It's tough to say whether the Fed will actually make adjustments, but any changes would have implications for not only investors, but also home buyers and other consumers.

Interest-rate hikes may garner most of the attention, but behind the scenes, the Fed has been shrinking its big $4.5 trillion balance sheet since October 2017. Now, it's shedding $50 billion worth of assets a month.

In the process, it's reversing the effects of a policy that it implemented during the last financial crisis and trying to return to "normal" after years of ultralow interest rates.

Balance-sheet reduction is something the Fed has never done before, and there's a lot of uncertainty regarding how long the process could take.

As mentioned in the minutes from the December Fed meeting, there's also the issue of how the central bank's benchmark interest rate stands in relation to the rate tied to excess reserves.

"The staff noted that the federal funds rate and other money-market rates could possibly become somewhat volatile at times as banks and financial markets adjusted to lower levels of reserve balances," the minutes said.

Powell's recent remarks put investors at ease.

"You just can't take a trillion dollars of reserves out of the system then, you know, not think that something's going to go bump in the night," said Greg McBride, CFA, Bankrate's chief financial analyst.

At the same time, it may be too soon to say whether any changes to the balance-sheet normalization plan will be made. At this point, the Fed doesn't know how small the balance sheet is expected to get. Any shift in the Fed's policy stance would depend on the conditions that made the central bank reconsider its original plan, McBride said. At the moment, the Fed is letting some of its maturing assets run off instead of reinvesting them.

As long as it continues its plan of unwinding its balance sheet, the result could potentially be higher mortgage rates for home buyers and more market volatility. Balance-sheet normalization paired with interest-rate hikes will cause the economy to slow and we could potentially end up in a recession. As concerns grow, it's high time for Americans to start padding their savings accounts," McBride said.