Hi. We're here with Carl Tannenbaum, chief economist of Northern Trust. Carl, great to see you.
Good to be with you. So the Fed has been talking about reducing its balance sheet. What are they talking about?
During the depth of the financial crisis, the Federal Reserve decided to add stimulus to the economy by buying a great number of securities in the open market. Ultimately they accumulated almost $3 trillion of new bonds that they wouldn't normally own. That was the core of what they called quantitative easing, and it was designed to add help to the economy once interest rates had reached zero.
So what's the potential impact on the economy if the Fed lets its investments run off?
The goal of the quantitative easing program was to bring down longer term interest rates such as those on mortgage loans to stimulate activity in those sectors. And also subtly by reducing the yields that people got on bonds, they were encouraging them to take a little bit more risk with their money so that the economy would grow a little bit more substantially. As the Fed reverses its policy, you would expect that both of those effects would move in the opposite direction, and very slowly remove some of the stimulus to the economy.
Should the Fed try to get back to where they were in 2008?
I don't think they're going to go all the way back to where they were prior to the crisis. The dynamic of the financial markets and banking have changed substantially since then, leading a lot of financial companies to hold a lot more deposits with the Fed. So they'll have to invest at that level, which is much higher than they had been before. And in addition, in an international environment, the Fed does need a little bit of a larger balance sheet in order to conduct its normal operations.
What exactly is stopping the Fed from selling its securities and getting to its targeted position?
Among the challenges of the Fed normalizing policy is communicating well with the markets and avoiding any upset. And certainly if they were to walk out into the markets some day and announce that they were selling $2 trillion of securities, that would be an immense amount. So likely they'll allow them to just mature over time in a very regular and passive way, and that should avoid disrupting the financial markets.
Carl, thanks for your time.