Yellen Says Fed Will Shrink Balance Sheet Slowly

The video discusses a strategic plan for managing reserves in the banking system by gradually reducing reinvestment in treasury and mortgage-backed securities. This involves setting caps on reinvestment, which will increase over time, leading to a predictable balance sheet runoff. The process aims to minimize disruption to financial markets. As the balance sheet shrinks, a rise in long-term interest rates is expected, affecting the yield curve. The federal funds rate will be adjusted to maintain maximum employment and price stability.

What is the primary strategy mentioned for managing the quantity of reserves in the banking system?

• Lowering interest rates

• Issuing more government bonds

• Reducing reinvestment in treasury and mortgage-backed securities

• Increasing the purchase of securities

Why is it important to manage the reserve reduction process carefully?

• To increase short-term interest rates

• To avoid disruption in financial markets

• To decrease the federal funds rate

• To ensure maximum employment

What is expected to happen to longer-term interest rates as the balance sheet shrinks?

• They will fluctuate unpredictably

• They will increase relative to short-term rates

• They will remain unchanged

• They will decrease significantly

What is the anticipated effect on the yield curve as the balance sheet is reduced?

• Steepening of the yield curve

• Inversion of the yield curve

• No change in the yield curve

• Flattening of the yield curve

What remains the primary tool for adjusting the stance of monetary policy?

• Federal funds rate

• Quantitative easing

• Reserve requirements

• Open market operations