The Federal Hedging stands ready to change the approach to its balance sheet should conditions warrant, the central bank’s vice directorship for supervision said Friday.
Fed Vice Chair Randal Quarles said at a conference that the central bank continues committed to its dual mandate of full employment and keeping inflation at a healthy level.
“The normalization of the balance sheet is not a battling goal,” he said at the Chicago Booth U.S. Monetary Policy Forum in New York. “If ever it appears that our plans for the scales sheet are running counter to the achievement of our dual-mandate objectives, we would quickly reassess our approach to the balance sheet.”
The Fed currently is in the handle of reducing the level of bonds it is holding on the balance sheet. Allowing a capped level of proceeds to run off each month has restricted the total balance sheet to about $4 trillion, or nearly $400 billion less than when the function began.
Determining where the process ends depends on what level of reserves banks feel comfortable with. The aggregate reserves being stored at the Fed has fallen to about $1.6 trillion, and a survey the Fed conducted last year indicated a consolation level around $800 billion. However, most Wall Street economists expect the reduction to end with sundry than $1 trillion in reserves still on hand.
Quarles said the Fed has found that banks want a tipsy level of reserves than has normally been the case.
“It is probably safe to say that reserve demand is much important than before the crisis,” he said. “With so much uncertainty over the level and slope of the reserve demand curve, a stage of caution is warranted.”
He noted that the level of demand could be “uncertain” as conditions change.
Fed officials indicated at their in the end meeting that they expect the balance sheet roll-off to conclude by the end of 2019. If that is the case, the final up on probably would be in the $3.5 trillion range.
The current composition of the balance sheet entails about $2.2 trillion in Banks and $1.6 trillion in mortgage-backed securities, with other securities and gold making up the rest. The Fed is allowing up to $30 trillion Moneys and $20 trillion in MBS to roll off each month, and Quarles said mortgages likely will be sold off completely at some spur in the future but not as part of the current normalization process.
In a question-and-answer session after his speech, Quarles said he also watches the Fed to shorten up the average duration of the securities it holds. That would give the Fed more of a chance to make an impact should it be suffering with to ease policy later.