WASHINGTON, Jan 20, Reuters -- As part of its fight against inflation and a return to normal monetary policy, the U.S. Federal Reserve is approaching a decision to reduce its balance sheet, which has doubled in size during the Pandemic, to nearly $9 trillion.
It's a huge stockpile that has helped hold down longer-term interest rates - including the mortgage rates that households worry about when they buy a home, and influences a wide range of asset and other prices in the economy.
It will be a long journey to a balance sheet that is big and it will be a long trip back to whatever level of assets the Fed decides to hold.
For most of the Fed's history, its footprint in government bond and securities markets was small and steady. In 2007 the central bank relied on quantitative easing or the purchase of large amounts of government debt as a way to funnel cash into the financial system.
Since then, the balance sheet has evolved in different stages, and officials are about to open the next chapter as they debate how fast to pull back from the key markets for U.S. Treasury bonds and mortgage-backed securities.
Financial markets are repriced the rates that households, companies and government pay to borrow money because of the fact that the Fed plans to raise its short-term policy rate.
Policymakers haven't decided how fast to make the drawdown this time. Fed Chair Jerome Powell said that they will go faster, though the endpoint is not clear. The Fed pulled a maximum of $50 billion a month from the financial system last time when it tried to tighten its quantitative tightening.
Oxford Economics Chief U.S. Financial Market Economist Kathy Bostjancic predicted a $90 billion per month pace, with analysts penciling in bigger numbers.
She wrote this week that the financial system can tolerate a reduction in the Fed's holdings of securities, with perhaps $1.8 trillion of excess liquidity sloshing through the financial plumbing. We expect the Fed to be aggressive.