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Former NY Fed President Bill Dudley on record Fed balance sheet

Former NY Fed President Bill Dudley never expected Federal Reserve balance sheet to be $7 trillion but there is no maximum limit.

Video Transcript

BILL DUDLEY: Well, I mean, the honest answer is, no I didn't expect it to be $7 trillion, certainly, from $4 trillion, you know, in just a few short months. That was a very rapid increase in the size of the balance sheet.

That said, there's no maximum limit the size of the Fed's balance sheet, and given how monetary policy is executed today-- in other words, by setting an interest rate on reserves-- the Fed can operate monetary policy totally independent of the size of its balance sheet. So if the Fed needs to go to a $10 trillion balance sheet, they could, and they would still maintain control of their ability to separately execute monetary policy.

The big issue, I think, from the Fed's big balance sheet is the Fed has interest rate risk. You know, most of their liabilities are these short-term reserves, and they hold long-duration assets. So in principle, if short term interest rates went up very, very sharply, the Fed's net interest margin could be under pressure, and the Fed-- that would mean that the Fed would-- you know, probably earnings would be less, and the amount of money that the Fed would pay back to the Treasury would be quite a bit less.

And if you took this, you know, to its logical conclusion, you know, very high short-term interest rates that occurred very, very rapidly would actually mean you generate losses on the Fed's balance sheet. But that's not something that the Fed is very worried about today, when they don't even think that they're going to be tightening monetary policy for three or four years at a minimum.