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Federal Reserve President Loretta Mester commented on Tuesday, taking part in a panel discussion aimed at shedding light on current economic conditions in the US. Mester stated that the Fed aimed to end balance sheet runoff in the near future, indicating that new monetary policies are in the works.

Key Takeaways

• The Fed aims to put an end to the runoff of bond holdings after letting its balance sheet wind down in the face of criticism against a perceived negative economic impact.
• The central bank accumulated bonds following the global recession of 2007-2009 to push down long- term borrowing costs, scaling back the initiative starting in 2015.
• Runoff has been capped at $50 billion since late 2017, but investors have begun to blame market volatility on the impact of the cap.

After raising interest rates in 2015 the Fed has allowed the balance sheet to shrink, letting bonds mature without replacing them with new bonds of equivalent value. The practice of letting the balance sheet shrink is referred to as runoff, and the Fed capped the monthly runoff at $50 billion to avoid impacting the financial markets with heavy-handed activity.

President Donald Trump joined in the criticism of the Fed’s balance sheet runoff late last year, warning of the Fed making “yet another mistake” and tweeting “stop with the 50 B’s” – major investors had begun voicing their opinions last year that the runoff was causing volatility throughout the markets.

I hope the people over at the Fed will read today’s Wall Street Journal Editorial before they make yet another mistake. Also, don’t let the market become any more illiquid than it already is. Stop with the 50 B’s. Feel the market, don’t just go by meaningless numbers. Good luck!

— Donald J. Trump (@realDonaldTrump) December 18, 2018

Policymakers Weigh In

“The Federal Reserve will chart plans to stop letting its bond holdings roll off “at coming meetings,” Cleveland Fed President Loretta Mester said on Tuesday in Cincinnati.

“At coming meetings, we will be finalizing our plans for ending the balance-sheet runoff and completing balance-sheet normalization. As we have done throughout the process of normalization, we will make these plans and the rationale for them known to the public in a timely way because transparency and accountability are basic tenets of appropriate monetary policymaking.”

Her remarks follow Fed Chairman Jerome Powell stating in late January that the US central bank would wind down the policy of letting bonds go unreplaced and may do so earlier than expected, also promising patience with further rate hikes.

San Francisco Fed President Mary Daly said on Friday that policymakers were starting to look at bond purchases not simply as a crisis policy but as a tool to be used even in situations where the Fed has not yet explored all rate cut options, signaling that there may be an upcoming policy shift with rate cuts being used less liberally.

Market Response

Today gold is holding gains and trading up 0.17% at $1,309.24/oz with a daily high of $1,314.30/oz and a low of $1,308.38/oz. Loretta Mester’s remarks regarding the Fed’s balance sheet runoff are arguably bullish for the USD, as is the suggestion that bond buying will be given a higher priority than before when compared to rate hikes, but these policies are not necessarily being implemented in the near-term.