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Powell Says Substantial Balance Sheet Shrinkage Is To Be Done


Q: You would raise rates and running off the balance sheet at the same time? You say it's going to be running in the background but the the FOMC says it's prepared to adjust details? What's the reaction function?

  • A: In the last cycle we had surprises, shrinking the balance sheet is complicated, and we amended our balance sheet principles a number of times. We didn't intend to do that, events required us to do so. We're free to do this at any time. If the situation turns out to be different than we thought we're not going to stick with something that isn't working.
  • Asset purchases were enormously important at the beginning of the recovery to restore market function.. then after they were a macro tool to support demand... and now the economy no longer needs this accommodation, so it's time to stop purchases and at the appropriate time, start to shrink the balance sheet.
  • The balance sheet is substantially larger than it needs to be.. substantial shrinkage to be done, that's going to take some time.
  • We're going to have a discussion at the next meeting and my guess at least one other discussion at the meeting after that.
  • (That last comment points to a final decision on QT potentially at the May meeting)

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