For immediate release
Contact: Daneil Mazone, Media Relations, 215-574-7163
London — Calling the process “a marathon, not a sprint,” Federal Reserve Bank of Philadelphia President Pat Harker said today that unwinding the Fed’s balance sheet should emphasize guiding principles, among them neutrality and flexibility.
“As laid out in the Normalization Plans and Principles, our aim is for the balance sheet to consist primarily of Treasury securities. That is not its current composition, and won’t be for some time, with MBS still accounting for 40 percent of our total asset holdings. Additionally, the remaining maturity of our Treasury holdings is still relatively long. … That means, of course, that we still have some normalizing to do,” Harker said at a conference in London.
“Even if economic and financial conditions evolve as anticipated, the composition of the balance sheet will not see any drastic change in the near future. And, as noted in January, the Committee is prepared to alter the size and composition of the balance sheet if future economic conditions warrant more accommodative policy than can be achieved by reductions in the federal funds rate alone.
“It is my own view, therefore, that the discussion should give primacy to principles over goals, both in guiding the long-run composition of the portfolio and its management along the transition.”
Harker said of executing the transition, “We intend to do that by keeping the size of our aggregate securities holdings constant for a time. During this period, we will see a very — and I do stress ‘very’ — gradual decrease in average reserves, as currency and other non-reserve liabilities grow over time.
“This slow and steady approach, which is based on work by the Philadelphia staff, is not only the safer option, it has the additional advantage of reducing uncertainty about the evolution of asset redemptions. It is, therefore, firmly in line with the FOMC’s stated objective to proceed in a ‘gradual and predictable manner.’”
Harker also warned against misinterpreting the continued attention and communication about balance sheet normalization. “While that does reflect its importance, it does not reflect our current monetary policy stance. We often refer to the FOMC’s ‘toolkit’ when discussing policy options. Balance sheet policy certainly remains an option, but we’ve put it back in the toolbox, and stored it in the basement — within arm’s reach, but out of sight for now.”