Fed's Ongoing Quest: Balancing the Balance Sheet Amid Economic Uncertainties

Federal Reserve Chairman Jerome Powell informed the House Financial Services Committee about the ongoing efforts to reduce the Fed's balance sheet. Despite significant reductions, the final endpoint is still uncertain. Powell remains vigilant about ensuring financial institutions have sufficient reserves while navigating through economic conditions and regulatory concerns.

Federal Reserve Chairman Jerome Powell addressed the House Financial Services Committee on Wednesday, revealing that the Fed has more work to do in reducing its balance sheet. This process, known as quantitative tightening, does not yet have a clear endpoint.

The Fed has already decreased its holdings by approximately $1.7 trillion but will proceed cautiously to ensure financial institutions maintain adequate reserves. Powell emphasized the progress made but highlighted the distance left to cover.

Initially, the Fed expanded its balance sheet in reaction to the COVID-19 pandemic to lower long-term interest rates and support the economy. Currently, the Fed is allowing $25 billion monthly of U.S. Treasuries and $35 billion of mortgage-backed securities to mature and expire.

Powell's second day of semiannual testimony to Congress included a review of the economic landscape and monetary policy, with important discussions about regulatory issues. Tuesday's testimony to the Senate Banking Committee showed growing confidence in reducing inflation but also an awareness of the risks associated with tightening monetary policy too much.

Despite the low unemployment rate of 4.1%, Powell pointed out its incremental rise over the past year. He suggested that more positive economic data could justify a reduction in the Fed's benchmark interest rate, which was set at 5.25% to 5.5% in July 2023.

(With inputs from agencies.)