Fed debate over size and holdings in balance sheet is heating up
Fed debate over size and holdings in balance sheet is heating up according to a WSJ report, which broadly summarizes the most recent remarks on the topic from Chair Powell and VC Clarida. "Smaller than it is now, but nowhere near what is was before" said Powell earlier this week, leaving a lot of scope, while Clarida argued for "flexibility" depending on the economic climate. Given direct criticism from the president and others for winding down the balance sheet too rapidly, the Fed has been on the defensive and seeking to refine its previous "auto pilot" stance. The fairest statement was that they actually don't know where it will end, but don't think it is adding to recent volatility. Two options remain: 1) keep draining securities until rates are pressured higher, or 2) stop shrinking before they become that scarce. Also the composition of the balance sheet with respect to MBS, etc. remains to be defined, as MBS are maturing more slowly now due to the slowdown in refi activity, which means the Fed could consider outright MBS sales to keep the portfolio drain proportional.