Federal Reserve Chairman, Jerome Powell, has revealed that Fed may end bond trimming this year.
Speaking before the House Committee on Financial Services on Wednesday, Jerome Powell told the Congressmen that the Fed has already held three discussions on how to stop trimming its massive bond portfolio in 2019. “We have come up with a framework that will enable us to achieve our goal and we hope to announce it soon,” he said. According to Powell, if the plan works out, it will put an end to asset runoff.
The Federal Reserve chairman who read out the Fed’s semiannual monetary report told Congress that during the 2008 financial crisis and recession, the central bank increased its holdings by more than four-fold. This was done to reduce long-term interest rates which they believed could spark economic growth. When the Feds started reducing the size of its holdings in October 2017, the balance sheet increased to $4.5 trillion.
Although the bond purchases by the central bank were aimed at boosting the economy, conservative Republicans spoke against it. The politicians said that the program gave the central bank too much control over the nation’s economy.
Following the announcement by Jerome Powell, financial markets are now concerned about the effect of the plan on the U.S. economy. Experts have said that a drastic reduction of bond holdings could cause long-term interest rates to climb and this may take a toll on the auto sales and real estate sectors.
The Fed balance sheet, which is composed of mortgage-backed securities and Treasury bonds, currently stands at around $4 trillion. Jerome Powell told the house that the Fed is working on having a larger balance sheet than it had before the financial crisis of 2008. The Federal Reserve chairman, however, did not specify the eventual size of the balance sheet. But some economic analysts are saying that it may fall to about $3 trillion or $3.5 trillion.