MNI POLICY: Fed Powell: Balance Sheet 'New Normal' By Year-End

By Jean Yung

     WASHINGTON (MNI) - Federal Reserve Chair Jay Powell on Friday said the

balance sheet may reach its new normal size by the end of the year and repeated

that the FOMC expects to announce plans to end asset runoffs soon. 

     "The Committee is now well along in our discussions of a plan to conclude

balance sheet runoff later this year," he said in remarks prepared for the

Stanford Institute of Economic Policy Research in California. "We expect to

announce further details of this plan reasonably soon."

     Current estimates of the "new normal" size of the balance sheet suggest

"something in the ballpark" of its fourth quarter projected value, he said. An

accompanying table projects Fed liabilities to be 16.5% of the Congressional

Budget Office's projection for GDP by the end of the year, or around $3.5

trillion, according to MNI calculations. 

     He repeated that the plan could change if economic and financial conditions

warrant and added that after decisions regarding the size of the balance sheet

have been made, the Fed will look at the ultimate maturity composition of the

portfolio. 

     The following are other highlights of the speech: 

     --Reiterated the FOMC's patient approach on rate moves. "With nothing in

the outlook demanding an immediate policy response and particularly given muted

inflation pressures, the Committee has adopted a patient, wait-and-see approach

to considering any alteration in the stance of policy." 

     --Core inflation is quite close to 2% and the health and strength of the

labor market look "as favorable as they have in many decades." 

     --Fed Vice Chair Richard Clarida and other members of the communications

subcommittee are exploring ways to more effectively communicate about the role

of the Fed's quarterly rate projections, or dot plot 

     --Average inflation targeting and other inflation "makeup" schemes deserve

"serious attention" in light of the likelihood that central banks might often be

stuck with scenarios in which rates are near zero, growth is slow and inflation

below target in the future. 

--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com