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Winding down the wind down

Federal Reserve Chairman Jerome Powell speaks during the 2019 Stanford Institute for Economic Policy Research Economic Summit at Stanford University on March 8 in California. The central bank’s regularly scheduled interest rate setting meeting concludes on Wednesday with a statement and press conference with Powell. For the first time this year the Fed will release its updated economic projections for the years ahead.
Federal Reserve Chairman Jerome Powell speaks during the 2019 Stanford Institute for Economic Policy Research Economic Summit at Stanford University on March 8 in California. The central bank’s regularly scheduled interest rate setting meeting concludes on Wednesday with a statement and press conference with Powell. For the first time this year the Fed will release its updated economic projections for the years ahead. Getty Images

The Federal Reserve’s interest rate proclamations deserve the attention they receive, but that’s not what the investment markets will be listening for in the week ahead.

The central bank’s regularly scheduled interest rate setting meeting concludes on Wednesday with a statement and press conference with Chairman Jerome Powell. For the first time this year the Fed will release its updated economic projections for the years ahead.

Watching just how fast the slowdown in those estimates are could be jarring for the stock market. Powell has been unusually public for a Fed chairman. He appeared on “60 Minutes,” playing the role of economic assurer-in-chief. “We see the economy as in a good place,” he told CBS.

Before he was on one of the highest-rated broadcast television programs reaching more than 8.6 million viewers, he spoke to a much smaller group at Stanford University. In that speech, he said the bank was “well along” in planning on ending its wind down of its balance sheet.

In the years after the Great Recession, the Fed bought billions of dollars of government bonds and bonds backed by home mortgages. The idea was to buy the bonds in order to keep borrowing rates low. It worked. In late 2017, the Fed began allowing these bonds to roll off its balance sheet as they matured. The Fed calls it “normalization.” Since 2017, the balance sheet has shrunk by $500 million to just below $4 billion.

If buying the bonds was helped support the economy, then, logically, removing them from the Fed’s balance sheet has to act like an economic brake.

“There is no real precedent for this balance sheet normalization process,” admitted Powell to his Stanford audience. Knowing where the Fed is in that process is important for investors and the economy.

Tom Hudson hosts “The Sunshine Economy” on WLRN-FM, where he is the vice president of news. Twitter: @HudsonsView.

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