FOMC Member Outlines Avenue for Fed Balance Sheet Reduction

On Sunday, April 9th, during an interview with Bloomberg, St. Louis Fed President James Bullard laid out a potential path for the Federal Reserve to shrink its $4.5 trillion balance sheet.

Bullard began by saying "first of all, $4.5 trillion is higher than anyone thinks it should be," acknowledging that the central bank's massive holdings threaten to limit its available policy responses to future downturns. He then went on to say that the Fed could shrink its balance sheet more passively by allowing "the reinvestment policy to end and then … gradually run-off the balance sheet over time."

Bullard highlighted that this approach would avoid much of the volatility which many fear could be sparked by a Fed move to unwind its holdings, saying rather that it would "be taken in stride by markets."

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