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Fed Likely To Use Smaller Balance Sheet As Initial Tightening Move

One of the regional leaders of the U.S. central bank has said that he expects to see the first fiscal tightening to be implemented through the reduction of the bank’s balance sheet, according to Bloomberg.

One of the regional leaders of the U.S. central bank has said that he expects to see the first fiscal tightening to be implemented through the reduction of the bank’s balance sheet, according to Bloomberg. On Wednesday, Federal ReserveBank of St. Louis President James Bullard said it is “reasonable” to believe that the Federal Reserve will tighten policy before the end of the year. Bullard continued, “I like a balance-sheet-first policy and I think the Fed will take a balance sheet-first policy,” which would see officials allowing bonds to mature without replacing them.

Other Fed officials have discussed alternative means of fiscal tightening, with Minneapolis head Narayana Kocherlakota favoring an interest rate increase. Bullard and other officials are becoming increasingly concerned about the first signs of building inflationary pressure, and the St. Louis leader said the balance sheet could create “a lot of inflation” if not wound down at the appropriate time. Bullard offered his assessment that, “The end of QE2 is high tide of easy monetary policy,” and that lackluster first quarter growth will allow policymakers to hold back on immediate action once the stimulus program ends.

Click here to read the story from Bloomberg News.

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