Federal Reserve’s Hammack flags deep uncertainty over balance sheet effects on the economy

Beth Hammack, president of the Federal Reserve Bank of Cleveland, is saying the quiet part out loud: the Fed doesn’t fully understand what its massive balance sheet is doing to the economy. In remarks to the Money Marketeers of New York University, Hammack acknowledged that identifying when reserves transition from abundant to scarce is “extremely difficult,” a candid admission from someone sitting inside the institution responsible for managing those reserves. The comment lands at a moment when the Fed’s balance sheet stands at roughly $6.7 trillion, down from a peak near $9 trillion in early 2022. That’s a substantial reduction, but still enormous by any historical standard. And Hammack is essentially arguing that nobody has a clean model for what all that balance sheet heft actually means for markets, borrowing costs, and risk-taking behavior. The case for shrinking, slowly Hammack isn’t calling for the Fed to slam on the brakes. Instead, she’s advocating for a measured pace of quantitative tightening, the process by which the Fed lets bonds roll off its balance sheet without reinvesting the proceeds. The goal is to land in what she describes as a “just-above-ample” reserves reg...