Fed: “Normalizing” the balance sheet - Nomura

When the Federal Reserve began its large scale asset purchases in late 2008 they set a course without knowing where it would take them and they did not know that emergency asset purchases in the midst of a historic financial crisis would extend into a means of providing monetary stimulus once the financial stress had dissipated, explains the analysis team at Nomura.

Key Quotes

“They did not know that it would take almost nine years just to start the process of unwinding those policies. They did not know that paying interest on an elevated level of reserves would not be able to provide a floor for short-term interest rates. They did not know how financial regulations would change and how those changes would affect how monetary policy works. Most importantly, they did not know how their policies would affect financial markets and ultimately the economy, particularly beyond the immediate future.” 

“In many ways, the FOMC is about to do this again. The FOMC has laid out its plans for how the process of balance sheet adjustment will begin, and how it will proceed in its initial stages. However, after the FOMC meeting in June, Chair Yellen said quite explicitly that they expect to begin the process of reducing their balance sheet without knowing where the process will end. Given the breadth of issues at stake and the inherent uncertainties, that may be all the FOMC can do. After all, the policymakers that complete the process of normalizing the Federal Reserve’s balance sheet will not be the ones who started the process.”