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Question from MNI's Jean Yung On The Balance Sheet Plans

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  • Q (from MNI's Jean Yung):You said starting the taper sooner could get you to a smaller balance sheet size, does that mean you don't have to make a decision on when to end QT at this point, and will you set up the process for deciding that sooner or will you wait until we're close to the end?
    • A: It's ironic that by going slower you can get further. The idea is that with a smoother transition, you'll run much less risk of liquidity problems which can grow into shocks and cause you to drop the process prematurely. In terms of how it ends, we're going to be monitoring carefully market variable and what they are telling us about reserves. Right now we would characterize reserves as abundant. We're aiming for "ample", which is a little bit more than abundant. There's not a dollar amount or percent of GDP.
    • You ultimately reach a point where you stop allowing the balance sheet to run off and then from that point there's another period in which non-reserve liabilities grow organically, like currency, and that also shrinks reserves at a slow pace. You have a slower pace of runoff, which we will have fairly soon, and you have another time where you effectively hold the balance sheet constant and allow non-reserve liabilities to expand, and that brings it in to a nice easy landing above what we think the lowest possible ample level would be. We want to have a buffer for reserves, and don't want to find ourselves I na situation where we have to buy assets and put reserves back into the system like 2019-20.
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  • Q (from MNI's Jean Yung):You said starting the taper sooner could get you to a smaller balance sheet size, does that mean you don't have to make a decision on when to end QT at this point, and will you set up the process for deciding that sooner or will you wait until we're close to the end?
    • A: It's ironic that by going slower you can get further. The idea is that with a smoother transition, you'll run much less risk of liquidity problems which can grow into shocks and cause you to drop the process prematurely. In terms of how it ends, we're going to be monitoring carefully market variable and what they are telling us about reserves. Right now we would characterize reserves as abundant. We're aiming for "ample", which is a little bit more than abundant. There's not a dollar amount or percent of GDP.
    • You ultimately reach a point where you stop allowing the balance sheet to run off and then from that point there's another period in which non-reserve liabilities grow organically, like currency, and that also shrinks reserves at a slow pace. You have a slower pace of runoff, which we will have fairly soon, and you have another time where you effectively hold the balance sheet constant and allow non-reserve liabilities to expand, and that brings it in to a nice easy landing above what we think the lowest possible ample level would be. We want to have a buffer for reserves, and don't want to find ourselves I na situation where we have to buy assets and put reserves back into the system like 2019-20.