Federal Reserve

Powell says Fed's balance sheet will be 'substantially smaller,' indicating more tightening ahead

Key Points
  • Federal Reserve Chairman Jerome Powell says the central bank's balance sheet will be "substantially smaller" than it is now.
  • The remark implies that the Fed will continue a process market participants call "quantitative tightening" of policy.
  • The Fed had been holding about $4.5 trillion worth of mostly Treasurys and mortgage-backed securities and has reduced the total by about $400 billion during the balance sheet roll-off.
Fed's Powell says he's very worried about amount of US debt
VIDEO2:5702:57
Fed's Powell says he's very worried about amount of US debt

The Federal Reserve's balance sheet will be reduced significantly from where it is now, Chairman Jerome Powell said Thursday in remarks signaling that more monetary tightening is ahead.

Powell did not specify how much smaller the central bank's portfolio of bonds would get, but the remark seemed to take some momentum out of the stock market during afternoon trading.

"It will be substantially smaller than it is now," the chairman said during a discussion at the Economic Club of Washington. "It will be smaller than it is now, but nowhere near where it was before."

The Fed had been holding about $4.5 trillion worth of mostly Treasurys and mortgage-backed securities that it accrued during three rounds of monetary stimulus during and after the financial crisis.

Starting in October 2017, the Fed began allowing a fixed cap of proceeds from those bonds to run off each month, with the level now reaching a ceiling of $50 billion. The Treasury and MBS holdings have contracted by about $400 billion since the operation began. The overall balance sheet is now below $4 trillion.

The balance sheet roll-off has been referred to "quantitative tightening" as opposed to the "easing" that beefed up the balance sheet.

Wall Street has questioned whether the Fed should be cutting the balance sheet at the same time it is raising its benchmark interest rate. The policymaking Federal Open Market Committee approved four rate hikes in 2018 and has indicated perhaps two more are ahead this year.

Fed officials have said they expect the run-off to happen without disruption — former Chair Janet Yellen likened it to "watching paint dry" — and Powell defended the operation during his chat Thursday with David Rubenstein, co-founder of the Carlyle Group, where Powell once worked.

"We wanted to have the balance sheet return to a more normal level, which is a level no larger than it needs to be for us to conduct monetary policy," he said.

Minutes from the December FOMC meeting show some concern over where the process is headed. Fed economists cautioned that the federal funds rate that the central bank uses as its benchmark could become volatile during the roll-off.