Balance Sheet Normalization Principles and Plans

The core inflation rate is low at 1.6% missing the target of 2% with federal fund rate hovering around 2.5%. Hopefully, as Mr. Powell discussed, low inflation number is temporary. The Fed balance sheet is down to $3.9T and has both Mortgage Backed Securities and Treasuries. The low inflation is worrisome since the US economy is in top gear. Unemployment at the lowest levels with one of the highest wage growth in recent years, low core inflation (excluding energy and food prices) smells trouble.

Inflation is of two types: the supply side and the demand side. Printing excess money did not yield in much inflation and we will have to wait and see the next quarter for the demand side effect to structure out. Monthly treasury securities reduction is down to $15B from $30B from this month. With low inflation, pruning security reduction makes sense although according to experts treasury security reduction did not cause liquidity crunch. FED is right in waiting for another quarter to understand the direction of inflation for a more decisive action.  

Attaching the link to the balance sheet normalization plan of the FED.

https://www.federalreserve.gov/newsevents/pressreleases/monetary20190320c.htm

Implementation Note Issued May 1, 2019

https://www.federalreserve.gov/newsevents/pressreleases/monetary20190501a1.htm

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