Update on the Federal Reserve

John Williams, the President of the San Francisco Federal Reserve Bank, in an interview with the Wall Street Journal, said that he believes the central bank’s securities portfolio hasn’t grown to “anywhere near” the size that would inhibit the Fed from continuing its bond buying program.  The Fed is scheduled to provide an update on its balance sheet this Friday.  The Fed’s balance sheet has swelled to $2.88 trillion, from less than $900 billion in early 2008.  After growing in size since the financial crisis, the balance sheet was largely unchanged since mid-2011.  The balance sheet began growing again last summer, after the Fed announced it would begin buying $45 billion of mortgage bonds each month.  Some economists are concerned that the bigger the balance sheet, the longer and trickier it will be for the Fed to unwind simulative measures and normalize monetary policy.  The recent minutes of the FOMC suggest that an economic target, such as unemployment falling below 7%, may be a prerequisite for the Fed to begin reducing it’s stimulus.  With the unemployment rate falling in 37 states last month, and the unemployment rate below 7% in 23 states, 2013 may turn out to be a very interesting year for monetary policy. We will be watching for clues as to the future of Fed policy at its two day meeting December 11-12th.