Chair Powell’s Insights: Navigating the Economic Outlook and Future Monetary Policy

Thank you, Emily, and the National Association for Business Economics for the Adam Smith Award. It’s truly an honor to be mentioned alongside former recipients like Janet Yellen and Ben Bernanke.

Today, I want to help you understand an important yet complex part of monetary policy: the Federal Reserve’s balance sheet. This topic might not seem exciting, but it’s crucial for our economy.

### The Role of the Federal Reserve’s Balance Sheet

The Federal Reserve’s balance sheet is essential for providing stability to our financial system. As of early October, the liability side amounted to $6.5 trillion. Most of this comes from three sources: physical currency (about $2.4 trillion), reserves (around $3 trillion), and the Treasury General Account (roughly $800 billion). Reserves are the safest asset in the financial world, and they help banks operate smoothly.

On the asset side, we mainly hold government securities—$4.2 trillion in U.S. Treasury securities and $2.1 trillion in government-backed mortgage securities.

### Impact During the Pandemic

The Fed’s balance sheet became a vital tool during the COVID-19 pandemic. When the economy halted in March 2020, we swiftly established emergency programs to keep financial markets functioning and support households and businesses. At one point, loans from these facilities exceeded $200 billion. These interventions were crucial in restoring stability.

To keep credit flowing, the Fed also had to buy Treasury securities at an unprecedented rate early in the pandemic. This helped ensure that the economy could recover once conditions improved.

### Current Framework and Future Outlook

Fast forward, our approach now is known as the “ample reserves framework.” This means we ensure there is enough liquidity in the banking system, allowing us to control interest rates effectively. Since June 2022, we have reduced our balance sheet by $2.2 trillion, from 35% to about 22% of GDP.

Interestingly, the demand for reserves has increased, reflecting changes in the banking system and the economy itself. Over the long term, the size of our balance sheet will be dictated by the public’s need for our liabilities rather than just our pandemic actions.

### Recent Economic Insights

In terms of employment and inflation, the data suggests a relatively stable outlook. However, economic growth appears to be gaining strength. The unemployment rate has remained low, but job gains have slowed. Concerns about possible job losses are arising as labor market dynamics shift.

Inflation rates are worth noting, too. As of August, core PCE inflation stood at 2.9%, slightly higher than earlier this year. Price hikes in goods are being driven more by tariffs than by widespread inflationary trends.

### Conclusion

In summary, the Federal Reserve’s balance sheet plays a critical role in maintaining economic stability, especially in challenging times like the pandemic. Our careful strategies have allowed us to navigate turbulent waters, and we remain committed to adjusting our approach based on evolving economic conditions.

Thank you once again for this recognition. I look forward to our continued discussion.



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