Fed officials nearing decision to increase balance sheet: Report
Federal Reserve officials are moving closer to a decision about ending the reduction of bonds it’s holding on its balance sheet, which could be indicative of how policymakers at the U.S. central bank set monetary policy in the year ahead, according to a report from The Wall Street Journal.
Although officials are still hashing out specific strategy details, planning for the bond portfolio could become the main focus at next week’s two-day Federal Reserve Open Market Committee meeting, since interest rate increases are on hold for now, according to the report. Powell will hold a press conference after the meeting concludes.
“A lot of the heavy lifting has been done,” Kansas City Fed President Esther George told the Journal. “We’re waiting for the committee to be satisfied that they have reached sufficient understanding of what all the moving pieces are.”
In 2017, the Fed began to shrink its $4.5 trillion holdings of bonds and other assets, known as its balance sheet, which was expanded during the financial crisis and used to pump banks with money bought as bonds. With an unprecedented amount of holdings, the Fed was able to push down long-interest interest rates.
The central bank generally maintains the size of its portfolio by reinvesting the proceeds from its assets; in order to shrink it, they began to gradually taper that process. They believed it could shrink the portfolio to anywhere between $1.5 trillion and $3 trillion and indicated the process could take several years.
But the latest discussions suggest the runoff could end much quicker than originally anticipated.
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According to the Journal, the debate over increasing the balance sheet is largely being driven by a technical debate about reserve in the banking system -- not about whether officials want to provide more or less stimulus to the economy.
Wall Street and investors are likely to be happy about the news; on Friday, stocks opened higher on the expectations that the central bank would permit a much larger balance sheet.