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Did The Fed Just Back Down? | Joseph Wang & Michael Ippolito
Forward Guidance
The Fed's Ability to Keep Rolling Treasury Securities Off Their Balance Sheet
The Fed has two policy tools. One is the overnight rate, and they've noted many times that they would like the overnight rate to be the primary tool through which they conduct monetary policy. They prefer this because they feel like they understand it better. The alternative tool is the balance sheet, and back when rates were zero, they went and bought a whole lot of Treasury securities to try to push down logaritha and the Treasury yields as a way to put off additional accommodation into the market. So now that we are hiking rates, Fed is trying to shrink its balance sheet. My sense is that going forward, they're going to continue to let the balance sheet shrink in the background while
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