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Former NY Fed President Says the Fed's Balance Sheet Shrunk Too Much in 2019

Our hoot of the day goes to former NY Fed president Bill Dudley for his comments on the Fed's balance sheet.
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Fed's Balance Sheet 2022-09-07

Balance Sheet Shrunk Too Much in 2019?!

Please consider the above video interview.

Dudley: Fed will taper its balance sheet reduction the deeper we get in the process. The Fed will stop before we get to that critical point.

Lou Dobbs: Have you done an experiment that says this is going to work or are you flying blind?

Dudley: I think you did the experiment last time following the great financial crisis. The Fed shrunk its balance sheet and we had that experience in 2019 where they shrank it a little too much.  The Fed will learn from that episode. If rates spiked up too much, banks would turn to to the Fed's standing repo facility. This time the Fed has a belt and suspenders.

Belts and Suspenders

Money Market Funds Security Repurchase Agreements

Not to worry, the Fed has belts and suspenders that it can increase at any time. 

Importantly, the Fed conduct QE and QT simultaneously if need be.

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What a Hoot!

First it's an admission the Fed's QE policy was experimental and flying blind. 

Second, Dudley complains that tiny shrinkage was too much and the Fed will learn by not doing too much QT.

Third, Dudley is saying that QE will never be fully reversed. And if anything fails the Fed has plenty of belts and suspenders.

A Word About Credibility 

For more on the Fed's credibility problem, please see The Fed Will Hike to 4 Percent Come Hell or High Water

This post originated at MishTalk.Com.

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