N.Y. Fed’s Williams says it could start trimming the balance sheet

Key takeaways: 

• According to the New York Fed chair John Williams, the Federal Reserve may start trimming its balance sheet shortly after its May 3-4 meeting to manage inflation dangers.
• Inflation running at 6.5%, more than threefold the Fed’s 2% target, is the central bank’s “greatest challenge,” according to Williams.
• Williams stated inflation might be forced higher by the conflict in Ukraine, the continuing pandemic, and continued labor and supply needs in the U.S.

The Federal Reserve may start trimming its balance sheet as shortly as its May 3-4 meeting to manage inflation risks that have become “especially acute,” New York Fed chair John Williams said Saturday.

With Fed rate gained underway and predicted to continue, Williams, who also has the title of vice-chair and is a permanent voter on financial policy, flagged the possibility the central bank will now start shrinking economic conditions through a second channel by allowing its almost $9 trillion portfolios of Treasury bonds and mortgage-backed securities fall each month.

“This decreasing the balance sheet size can start as soon as the May (Federal Open Market Committee) meeting,” Williams said at a meeting at Princeton University’s Griswold Center for Economic Policy Studies.

He noted inflation running at 6.5%, more than treble the Fed’s 2% mark, as the central bank’s “greatest challenge,” with inflation potentially pushed higher by the battle in Ukraine, the ongoing pandemic, and persisted labor and supply shortages in the U.S.

“Hesitation regarding the economic outlook stays extraordinarily high, and risks to the inflation outlook are mainly acute,” Williams said.

However, he said he anticipated the combination of rate increases and balance sheet drop to help reduce inflation to approximately 4% this year and “close to our 2 percent longer-run goal in 2024” while keeping the economy on track.