A Conversation with Federal Reserve Governor Christopher J. Waller

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Fed’s Waller: US Central Bank Likely Has Some Ways To Go In Shrinking The Size Of Its Holdings - Hypothetical $5.8T Balance Sheet Might Be Right Level To Aim For Vs Current $6.7T - $2.7T In Reserves Might Be Right Level To Aim For Vs Current $3.3T - Fed's Balance Sheet May Not… Fed's Waller: The Fed's balance sheet may not need to shrink as much as some expect. Demystifying the Federal Reserve's Balance Sheet Thank you, Lorie. Let me start by expressing my deepest condolences to the families and loved ones of those harmed by the flooding in the Hill Country. I cannot imagine the pain and anguish they are feeling. My prayers go out to all those affected. Turning to my remarks for today, thank you also for the opportunity to speak to you about the Fed's balance sheet, one of the more complex, and, I believe, misunderstood aspects of the Federal Reserve's role as a central bank.1 To level set the conversation, let me start with some simple facts. In August of 2007 our balance sheet was around $870 billion, equal to approximately 6 percent of nominal gross domestic product (GDP). Today it is around $6.7 trillion, with a t, which is about 22 percent of GDP. This is down significantly from its maximum size of nearly $9 trillion in early 2022 but still quite large. Since nominal GDP has essentially doubled since 2007, if our balance sheet had grown at the same rate, it would be around $1.7 trillion today—not $6.7 trillion. An obvious question is why our balance sheet is so much larger than economic growth would have predicted. As an aside, let me point out that there is no consensus among economists about how large a central bank balance sheet should be, but it is logical to ask: if monetary policy worked when the balance sheet was 6 percent of GDP, why is it, and perhaps needs to be, proportionally so much larger now? A major reason is that the Federal Reserve embarked on two major balance sheet policy initiatives over the past twenty years to respond to urgent problems in the economy. First, we engaged in quantitative easing, or QE, to provide support to the economy after the advent of the Global Financial Crisis and then again with the COVID-19 pandemic. Second, we consciously changed our im

Fed's Waller: Tariffs increase prices one time, central banks can look through that. Fed's waller: Tariff effects not zero but are not large either. FED’S WALLER NOTED THAT UNEMPLOYMENT IS NEAR ITS LONG-RUN LEVEL AND REITERATED THAT A JULY RATE CUT IS POSSIBLE, EMPHASIZING IT WOULD BE BASED ON DATA, NOT POLITICS.