Echoing the thoughts of Yellen and other Fed members, the Dallas Fed’s Robert Kaplan indicated that the $4.5 trillion balance sheet should begin the scale-back process this year. “Gradually and patiently” was the phrase used, as they are ever wary of a tantrum on Wall Street. Reuters reports:
“My view is we could start that process as soon as later this year,” Kaplan said in Fort Worth at the Cornerstone Credit Union League Annual Meeting, adding that he would prefer the Fed phase in the reductions to its portfolio so as to manage the impact on markets.
The last time the Fed signaled a change of course on the balance sheet, in 2013 under Fed Chair Ben Bernanke, yields shot up quickly, delaying the central bank’s plans for returning monetary policy to a more normal setting.
Consider this a reminder that Wall Street’s overreaction to slowing of easy money heavily weighs on the Fed’s “objective and scientific” monetary management style. If Wall Street doesn’t like it, then the Fed will give in. At any rate, right now the balance sheet normalization narrative is going full steam ahead.
