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Fed Chair Powell says balance sheet decision market is waiting for is 'close' to happening

Key Points
  • Fed Chairman Jerome Powell said Wednesday the central bank is close to a timetable on when its balance sheet reduction will end.
  • The balance sheet is currently just over $4 trillion, most of which is Treasurys and mortgage-backed securities bought to stimulate the economy.
  • An announcement will be coming "fairly soon," the central bank chief told House members.
  • "We are not looking at a higher inflation target, full stop," Powell also said
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Powell: We're close to an agreement on balance sheet plan

The Federal Reserve is close to a timetable on when it will stop reducing the amount of bonds it is holding on its balance sheet, Chairman Jerome Powell said Wednesday.

Determining the ultimate size and composition of the fixed income portfolio has been a key concern for investors nervous about how much further the Fed will tighten monetary policy. The central bank bought the bonds during and after the financial crisis in an effort to lower long-term interest rates and stimulate the economy, so reducing the size of the balance sheet has raised fears about whether it will have the opposite effect.

"We're close to agreeing on a plan which would light then way to the end of the process," Powell said during testimony before the House Financial Services Committee.

The Fed is reducing the bond holdings by allowing a maximum of $50 billion in proceeds to roll off each month and reinvesting the rest.

Powell added that he expects the reduction to end "sometime later this year."

Since the process began in October 2017, the amount of Treasurys and mortgage-backed securities the Fed holds has been reduced by about $448 billion to $3.8 trillion. At the same time, the amount of bank reserves has contracted from $2.8 trillion to $1.6 trillion.

In Senate testimony Tuesday, Powell said market estimates of around $1 trillion for bank reserves, plus some buffer, were probably accurate for when the reduction would end. While the numbers aren't directly related, the market has come to tie them together. That would coincide with a wrap-up by around the end of 2019.

Powell said he would expect the Fed to make a decision shortly that will be announced to the public.

"We actually don't know what the equilibrium demand will be. We're going to have to find it over time," he said. "My guess is we'll be announcing something fairly soon."

He noted market pressures have contributed to the balance sheet calculus.

"I think the markets became much more sensitive to these issues," Powell said.

Inflation target

On a related matter, he said the Fed also is not considering raising its inflation target.

The central bank considers 2 percent a healthy level for inflation but has fallen short of that target through much of the recovery. One alternative floated to generating some inflation would be for the Fed to increase its target, which could cause a rise in expectations.

"We are not looking at a higher inflation target, full stop," Powell said, adding that the Fed is examining alternatives to "more credibly achieve" its target.