New York Fed’s Williams says it could start trimming its balance sheet as early as May

The Federal Reserve Building in Washington, January 26, 2022.

Joshua Roberts | Reuters

The Federal Reserve could start trimming its balance sheet as soon as it meets May 3-4 to address inflation risks that have become “particularly acute”, New York Fed Chairman John Williams said on Saturday.

With Fed rate hikes underway and expected to continue, Williams, who also holds the vice-presidential title and is a permanent voter on monetary policy, signaled the likelihood that the central bank will now begin to tighten. financial conditions through a second channel leaving its nearly $9 trillion portfolio of treasury bills and mortgage-backed securities shrinking every month.

“This process of reducing the size of the balance sheet can start as early as the May (Federal Open Market Committee) meeting,” Williams said during a speech at a symposium at the University of Washington’s Griswold Center for Economic Policy Studies. Princeton.

He cited inflation at 6.5%, more than triple the Fed’s 2% target, as the central bank’s ‘biggest challenge’, with inflation potentially driven higher by the war in Ukraine, the ongoing pandemic and ongoing labor and supply shortages in the United States.

“Uncertainty about the economic outlook remains extraordinarily high and risks to the inflation outlook are particularly acute,” Williams said.

However, he said he expected the combination of rate increases and balance sheet shrinkage to help bring inflation down to around 4% this year, and “close to our long-term target of 2 % in 2024” while keeping the economy on track.

“These actions should enable us to manage the proverbial soft landing in a way that maintains a strong and sustainable economy and labor market,” Williams said. “Both are well positioned to resist tighter monetary policy.”

The Fed raised its short-term federal funds rate in March by a quarter of a percentage point and is expected to continue rate hikes at each of its six remaining meetings this year. Some Fed officials have advocated larger increases of half a point to further tighten credit and act against inflation.
Williams did not address that issue in his prepared remarks, but said earlier that he would be open to the idea depending on how economic data develops.

Shrinking the size of the balance sheet, however, provides a second method of tightening credit. As the stock of assets held by the Fed declines, this puts upward pressure on Treasury bond and mortgage rates.

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