In this piece, Raphael Bostic, president and chief executive officer of the Atlanta Fed, examines the impact of the FOMC reducing the Fed’s balance sheet and the conduct of US monetary policy.
“In June 2017, the Federal Open Market Committee (FOMC) determined that it was appropriate to begin the process of reducing the size of the Fed’s balance sheet, which had more than quadrupled as a result of efforts to combat the financial crisis and support the subsequent recovery from a very deep recession.
As I noted in a speech last November, I see the Committee’s strategy for shrinking the balance sheet as having two essential elements.
First, the normalization process is designed to be gradual. It was phased in over the course of about a year and a half and is now subject to monthly caps so the run-down is not too rapid.
Second, the normalization process is designed to be as predictable as possible. The schedule of security retirements was announced in advance so that uncertainty about the pace of normalization can be minimized. (In other words, “quantitative tightening” is decidedly not on the QT.) As a result, the normalization process also reduces complexity. Balance-sheet reduction has moved into the background so that ongoing policy adjustments can focus solely on the traditional interest-rate channel.”
Read the full article here: