Christopher Waller, Speech: Fighting Inflation with Rate Hikes and Balance Sheet Reduction
Rate Hikes: “The pace of tightening will depend on the data. One possibility is that the target range is raised 25 basis points at each of our next four meetings. But if, for example, tomorrow’s PCE inflation report for January, and jobs and CPI reports for February indicate that the economy is still running exceedingly hot, a strong case can be made for a 50-basis-point hike in March. In this state of the world, front-loading a 50-point hike would help convey the Committee’s determination to address high inflation, about which there should be no question. Of course, it is possible that the state of the world will be different in the wake of the Ukraine attack, and that may mean that a more modest tightening is appropriate, but that remains to be seen.”
Balance Sheet Reduction: “I support starting this process no later than the July FOMC meeting. The pace of the reduction in asset holdings has not been determined but will be consistent with promoting the FOMC’s employment and inflation goals and will be communicated well in advance to the public so that the plan is predictable.”
“The last time we reduced our balance sheet we did the following: First, we waited two years after our first-rate hike before commencing balance sheet runoff. Second, we imposed monthly caps on the amount of maturing securities that we would let run off. These caps started out very low and were gradually lifted over a period of 12 months. So, why not follow the same strategy this time?”
“First, back in 2017 and 2018 we had never intentionally reduced our balance sheet before. This was new territory for the Fed, so we went slow. Second, the Committee was considering moving to an ample reserves regime for conducting monetary policy, where we wanted to keep the banking system flush with reserves. Thus, we had no idea how far we could let reserves fall before we might cause an unwelcome shortage of reserves. Third, the economy was in a much different place; in particular inflation was much lower. Finally, we only expected to run off about $2 trillion of securities from our balance sheet. In that environment it made sense to go slow and gradual in terms of balance sheet reduction.”