A conversation about the Fed’s balance sheet — updated

By Alexandra Scaggs Apr 28, 2017 7:14 AM EST

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The Federal Reserve must have reasons it wants to shrink its balance sheet, but officials haven’t been terribly clear about them.

In fact, I wrote in the latest Weekend FT about some of the compelling arguments against reducing the size of its holdings, citing prominent academics (including Ben Bernanke!) who said it might make sense to change the balance sheet’s composition instead of its size. But rather than addressing those arguments publicly, officials have mostly just assumed it’s necessary:

As the Fed pushes ahead with plans to shrink its stock of about $2.5tn of Treasuries and $1.8tn of mortgage-backed securities to “normal”, it is puzzling that officials haven’t provided a compelling case for why the move is either necessary or desirable…

In fairness, Fed officials have urged caution. Boston Fed President Eric Rosengren said on Wednesday that officials should move slowly to avoid jolting markets, and should consider purchasing more securities in a downturn.

But Mr Rosengren’s argument assumes the desirability of shrinking the balance sheet in the first place — without articulating much of a reason. Neither have the rest of his colleagues.

More explanation from the Fed is needed — and it seems more explanation from me might be helpful, too. The best arguments against reducing the central bank’s Treasury holdings turn on details that the column didn’t have room for, and the explanation of that led to some interesting debates with readers and commenters.

So rather than boring you all with excessive sourcing, I’ve decided to present these debates as a fictionalised dialogue between an imaginary sceptical Alphaville reader and myself. If any real-life sceptical readers have questions or arguments, feel free to add them in the comments.

You say the Fed shouldn’t assume that it needs to shrink its balance sheet. This idea just makes

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