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Friday, September 02, 2016

Should the Fed Keep Its Balance Sheet Large?

Ben Bernanke:

Should the Fed keep its balance sheet large?: I attended the Fed’s recent gathering in beautiful Jackson Hole, Wyoming...
As usual, the media were most focused on divining the next policy move of the Federal Open Market Committee (FOMC), but I found the more interesting (and ultimately more consequential) discussions were about the Fed’s longer-term policy framework, the theme of the conference. In this post I’ll report on one important debate: the question of the optimal long-run size of the Fed’s balance sheet. It seemed to me that the strongest arguments made at the conference supported a strategy of keeping the balance sheet large (though comparable to other major central banks), rather than shrinking it to its pre-crisis level as the FOMC currently plans to do. ...
Overall, I think the FOMC’s plan to return to a pre-2008 balance sheet and the associated operating framework needs more thought. The appropriate size and composition of the Fed’s balance sheet inevitably depends on a range of complex decisions about the management of monetary policy and the role of the central bank in preventing and responding to financial crises. We’ve learned a lot about both areas since the crisis, and some important arguments have emerged for keeping the balance sheet larger than in the past. Maybe this is one of those cases where you can’t go home again.

[The full post explains why he believes that the balance sheet should be larger than in the past.]

    Posted by on Friday, September 2, 2016 at 11:00 AM in Economics, Monetary Policy | Permalink  Comments (18)


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