Fed’s Waller Says Return to Pre-2008 Small Balance Sheet Is Impossible
Summary
- Waller said the Fed’s balance sheet cannot return to the smaller level seen before the 2008 financial crisis.
- Markets are focused on the possibility that even if the Fed’s quantitative tightening (QT) continues, the pace of balance-sheet reduction and its final size may be limited.
- Some in the market say the Fed still has room for policy adjustments depending on financial-market stability and liquidity conditions in short-term funding markets.
Forecast Trend Report by Period
Federal Reserve Governor Christopher Waller said the central bank’s balance sheet cannot 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. He cited changes in the structure of the financial system and increased demand for reserves.
Waller said financial institutions and short-term funding markets now need more liquidity than in the past. He added that changes to the regulatory framework after the financial crisis have structurally increased banks’ demand for reserves.
Markets are watching the possibility that even if the Fed continues quantitative tightening, the pace of balance-sheet reduction and the eventual size of the portfolio 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. Some market participants also see room for policy adjustments depending on financial-market stability and liquidity conditions in short-term funding markets.
JH Kim
reporter1@bloomingbit.ioHi, I'm a Bloomingbit reporter, bringing you the latest cryptocurrency news.
