Summary
- Fed Governor Waller said there is “no way” to return to the small balance sheet framework of 2008.
- Markets are focused on the possibility that even if the Fed continues quantitative tightening (QT), the pace of balance sheet reduction and its eventual size may be limited.
- Markets say the Fed’s runoff of Treasuries and mortgage-backed securities (MBS) could be adjusted depending on financial-market stability and liquidity in short-term funding markets.
Forecast Trend Report by Period
Federal Reserve Governor Christopher Waller said the central bank’s balance sheet is unlikely to return to its pre-2008 financial-crisis size, a comment that underscores market focus on the Fed’s longer-term liquidity strategy.
Walter Bloomberg reported on May 22 that Waller said there is “no way” to return to the small-balance-sheet framework of 2008. The remarks reflected structural changes in the financial system and higher demand for reserves.
Waller said financial institutions and short-term funding markets now need more liquidity than in the past. He also said post-crisis regulatory changes have structurally increased banks’ demand for reserves.
Markets are watching whether, even if the Fed continues quantitative tightening, or QT, the pace of balance-sheet runoff and its eventual end point will be limited. The Fed expanded its balance sheet through large-scale asset purchases after the Covid-19 pandemic.
The Fed is currently reducing its holdings of Treasuries and mortgage-backed securities, or MBS. Still, some market participants say there remains scope for policy adjustments depending on financial-market stability and liquidity conditions in short-term funding markets.
JH Kim
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