Powell Says Fed Might Stop Shrinking Balance Sheet Soon

Watch Powell Says Fed Might Stop Shrinking Balance Sheet Soon - Bloomberg on Dailymotion

Transcript

00:00Our long stated plan is to stop balance sheet runoff when reserves are somewhat above the

00:04level we judge consistent with ample reserves conditions.

00:08We may approach that point in coming months, and we are closely monitoring a wide range

00:12of indicators to inform this decision.

00:15Some signs have begun to emerge that liquidity conditions are gradually tightening, including

00:19a general firming of repo rates, along with more noticeable but temporary pressures on

00:25selected dates.

00:26The committee's plans lay out a deliberately cautious approach to avoid the kind of money

00:31market strains experienced in September 2019.

00:35Moreover, the tools of our implementation framework, including the standing repo facility and a

00:40discount window, will help contain funding pressures and keep the federal funds rate within our

00:45target range through this transition to lower reserve levels.

00:51Normalizing the size of our balance sheet does not mean going back to the balance sheet we

00:54had before the pandemic.

00:56In the longer run, the size of our balance sheet is determined by the public's demand

00:59for our liabilities, rather than by our pandemic-related asset purchases.

01:06Non-reserve liabilities currently stand about $1.1 trillion higher than just prior to the pandemic,

01:13thus requiring that our securities holdings be equally higher.

01:17Demand for reserves has risen as well, in part reflecting the growth of the banking system

01:21and the overall economy.

01:24Regarding the composition of our securities portfolio, relative to the outstanding universe

01:28of Treasury securities, our portfolio is currently overweight longer-term securities and underweight

01:35shorter-term securities.

01:36The longer run composition will be a topic of committee discussion.

01:42Transition to our desired composition will occur gradually and predictably, giving market

01:46participants time to adjust and minimizing the risk of market disruption.

01:53Consistent with our longstanding guidance, we aim for a portfolio consisting primarily of Treasury

01:57securities over the longer run.