Powell warns of headwinds, says the Fed is prepared to 'adjust' balance sheet unwind if needed

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Powell rattled investors in December when he described the balance sheet roll-off as being on “autopilot,” but his remarks Tuesday represented a different tack.

“I would note that we are prepared to adjust any of the details for completing balance sheet normalization in light of economic and financial developments. In the longer run, the size of the balance sheet will be determined by the demand for Federal Reserve liabilities such as currency and bank reserves,” he said.

The Fed’s balance sheet, comprised mostly of Treasurys and mortgage-backed securities it bought in an effort to lower long-term interest rates and stimulate growth, swelled to $4.5 trillion but is now down to about $4 trillion due to the reduction process. Up to $50 billion a month in proceeds is being allowed to roll off, with the rest being reinvested.

While Fed officials expected the process to run smoothly, it began to attract market concern as financial conditions weakened in the fourth quarter.

Sen. Mike Crapo, the Idaho Republican who chairs the banking committee, said in a statement that he “has long been concerned” about the Fed’s stimulus programs and is looking for clarity on what the ultimate size of the balance sheet will be, among other concerns.

In addition to policy, Powell also addressed several other economic issues, in particular the continued low levels of inflation, currently running below the Fed’s 2 percent target, as well as weak productivity and public debt, which he said is “on an unsustainable path.”

Among positive developments, he cited stronger wage growth, especially among lower earners, as well as increased labor force participation.

Powell will speak to House of Representatives officials Wednesday.

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