At some point the Federal Reserve will have to begin to shrink its $4.5 trillion balance sheet, but that moment does not appear imminent.
Janet Yellen, the central bank’s chair, said Wednesday that the Fed will be taking a cautious approach to unwinding the massive collection of debt it owns, and probably won’t be doing so as a tool of monetary policy.
“Our short-term interest rate target is our key active tool of policy,” Yellen said during her quarterly post-Federal Open Market Committee meeting news conference. “We think it’s much easier using that tool to communicate the stance of policy. We have much more experience with it and have a better idea of its impacts on the economy.”
Market participants have been raising the question more often lately of when the Fed will begin running off some of its balance sheet. Under current policy, the Fed reinvests the proceeds from the Treasurys, mortgage-backed securities and other debt, which it rolls over as it matures.
At some point, though, the Fed will begin cutting the size of the balance sheet, a move that likely would push yields higher as supply increases.
Yellen said the Fed would be reluctant to use the balance sheet to try to stimulate or hold back the economy. It is on uncharted ground after running up the total through three rounds of quantitative easing from 2008-2014.
“What we’d want to have is confidence in the economy’s trajectory, a sense that the economy will make progress, that we’re not overly worried about downside risks with adverse shocks that could hurt the economy,” Yellen said.