The US Federal Reserve will stop shrinking its US$4 trillion balance sheet later this year, the central bank’s chairman Jerome Powell said on Wednesday.
“We’ve worked out, I think, the framework of a plan that we hope to be able to announce soon that will light the way all the way to the end of balance sheet normalization,” Powell told members of the House Financial Services Committee, Reuters reports.
“We going to be in a position … to stop runoff later this year,” he said, in what were his most detailed remarks to date on the subject, the report noted.
Doing so would leave the balance sheet at about 16 percent or 17 percent of GDP, up from about 6 percent before the financial crisis about a decade ago, according to the Fed chief.
The US GDP is currently about US$20 trillion, suggesting the Fed’s balance sheet would be between US$3.2 trillion and US$3.4 trillion.
The Fed has been trimming its balance sheet – bulked up by trillions of dollars of bond-buying during the post-crisis years to help keep interest rates low and bolster the economy – by as much as US$50 billion a month since October 2017. As recently as a few months ago it had expected to keep shrinking its portfolio for another couple of years.
In addition, Fed policymakers have come to the view that balance sheet policy should take financial and economic conditions into account.
Questions about the plan remain, including whether the Fed will adjust the maturities of its Treasury portfolio, and how it will go about shedding the mortgage-backed securities it accumulated during its asset-buying days, Reuters noted.
Powell’s remarks on the balance sheet came toward the end of more than two hours of testimony before the Democrat-led House panel that includes several newly elected members.
Powell was asked, about the Fed’s plan to rethink its policy framework this year. He assured lawmakers that the central bank is merely trying to refine its approach so it can meet its current 2-percent inflation goal.
“We are not looking at a higher inflation target, full stop,” he said.
Powell also repeated his warnings against a failure by Congress to raise the debt ceiling, saying there would be “bad consequences” should the US default on its debt payments.
– Contact us at [email protected]