By Michael S. Derby
NEW YORK (Reuters) -Federal Reserve Governor Christopher Waller said on Thursday the U.S. central bank still has some ways to go in shrinking the size of its holdings, in comments that offer a potential resting size for the ongoing drawdown, while flagging a desire to move the holdings to shorter-dated securities.
“Given my rough estimate of the level of reserves needed to be ample, I believe we can likely continue to let a share of maturing and prepaying securities roll off our balance sheet for some time, reducing reserve balances,” Waller said in the text of a speech to be presented at the Dallas Fed.
Against a Fed balance sheet that now stands at $6.7 trillion, with $3.3 trillion in bank reserves, Waller said the ongoing effort to reduce the holdings may have a visible target in view.
Waller said a “hypothetical” Fed balance sheet might stand at $5.8 trillion, with $2.7 trillion in reserves and $780 billion in the Treasury Department’s account with the central bank. He noted money market turbulence in the fall of 2019 suggests a drop in reserves to below 8% of GDP is an issue, so that metric helped inform his rough estimate of where overall Fed holdings might need to fall.
After more than doubling the size of its balance sheet to a peak of $9 trillion due to COVID-19 era bond purchases, the Fed has over the last three years been steadily shedding Treasury and mortgage bonds as part of a broader normalization of monetary policy.
(Reporting by Michael S. Derby; Editing by Paul Simao)
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