Fed Considers Slowing Balance Sheet Reduction to Loosen Financial Conditions

• The Fed is considering slowing the pace of shrinking its balance sheet, known as quantitative tightening (QT), as another way to loosen financial conditions as inflation falls.

• QT involves allowing bonds purchased during quantitative easing (QE) to mature without replacing them, reducing excess bank reserves.

• Officials want to avoid the volatility that happened last time they tried QT and may slow runoff once reserves get close to an "ample" level.

• The Fed has shrunk its balance sheet by $1.5 trillion over the past 2 years from a peak of $9 trillion, at a pace of $100 billion a month.

• Some officials say a decision on the balance sheet may not come this week, but changes to it are separate from interest rate decisions.