UPDATE: MNI POLICY: Fed Close to Finalizing Plan to End QT

--Adds Powell Comment on QT Expected to End This Year 

--Adds Powell Comment on Adjusting Balance Sheet Plan If Warranted

By Jean Yung

     WASHINGTON (MNI) - The FOMC is nearing consensus on a plan to cease

reducing its balance sheet this year and will likely announce something "fairly

soon," Federal Reserve Chair Jay Powell told lawmakers Wednesday, signaling that

a decision will be made public at the March FOMC meeting. 

     "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 the balance

sheet normalization and that will result in the end of asset runoff some time

later this year," Powell told the U.S. House of Representatives on the second

day of his semi-annual report to Congress. 

     The ultimate size of the balance sheet will be driven by demand for bank

reserves, but the minimum level of reserves needed to control interest rates

effectively is unclear, Powell said.  

     Public estimates of around $1 trillion for that level appear to be

"reasonable," Powell said, but "We actually don't know what the equilibrium

demand will be. We're going to have to find it over time."

     Reserves are now near $1.6 trillion. The overall balance sheet has shrunk

to $4.0 trillion from $4.5 trillion at its peak in 2014. 

     --DATA DEPENDENT

     Asked why the Fed pivoted toward a more flexible stance on its balance

sheet normalization program this year, Powell said it reflected a change in

market reaction to its runoffs. 

     Whereas in December the Fed chief said he did not envision revisiting the

plan set in motion in late 2017, the FOMC in January said it "would be prepared

to adjust any of the details for completing balance sheet normalization in light

of economic and financial developments." 

     "The markets became much more sensitive to this issue," Powell said. 

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

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