QT’s Days May Be Numbered

It is said that if someone had only a limited time to live, they should spend it with an economist; the experience would seem like an eternity. We are not known as the most vivacious people.

It will therefore come as no surprise that economists are anxious for holiday celebrations to end. The American Economic Association (AEA) holds its annual meeting right after new year’s, and the event draws thousands. Many of the sessions are of somewhat academic interest, but a handful are more mainstream.

Such was the case last week, when Lorie Logan, the President of the Federal Reserve Bank of Dallas, offered her thoughts on monetary policy at the AEA meeting in San Antonio. There has been a lot said and written about how central banks might manage interest rates in 2024, but relatively little has been offered on how they might steer their balance sheets. Logan ventured into the latter territory, offering a potential roadmap for the year ahead.

As background, the Fed (among other central banks) built its investment portfolio amid the crises of 2008 and 2020. The process, known as quantitative easing (QE), was designed to continue providing stimulus when overnight interest rates were at zero. The Fed’s balance sheet went from about $900 billion in early 2008 to $4.5 trillion in 2015 and nearly $9 trillion in early 2022.