Fed’s balance sheet, swollen by QE, could take years to reach pre-crisis norms

by Ryan Smith09 May 2014
Since instituting its quantitative easing program, the Federal Reserve’s portfolio of assets has swollen from its 2007 level of $800 billion to about $4.5 trillion – and shrinking it to its pre-crisis levels could take years, according to Fed Chair Janet Yellen.

Yellen told a Senate panel Thursday that no decision had been made on the appropriate size of the Fed’s portfolio, according to a Reuters report.

However, she said, the portfolio may start to shrink once the Fed decides to raise interest rates, which have hovered near zero since 2008.

“We've not decided, and we'll probably wait until we're in the process of normalizing policy to decide, just what our long-run balance sheet will be,” Yellen said, although she added that it would eventually be “substantially lower” than it is now. She said it could take five to eight years from that point to return the Fed’s balance sheet to pre-crisis levels.

There have been three rounds of bond-buying stimulus since the economic meltdown. Currently, the Fed is still buying $45 billion in Treasury and mortgage bonds each month – although those purchases should end in October.

The bond-buying program was a boon to the mortgage industry, shrinking interest rates to near-record lows and kicking off a boom in refinancing. When the Fed began to talk about tapering its bond buys last year, interest rates spiked by more than a percentage point, strangling the refi boom.
 

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