I am confident that the FOMC’s plan will promote good market functioning in the Treasury and agency mortgage-backed securities markets as the portfolio declines, and that it will not prove disruptive to the U.S. mortgage market or the U.S. Treasury’s debt management program. And I am also confident that the plan’s design, and the FOMC’s clear communication prior to the plan’s implementation, will mitigate the risk of sharp or outsized asset price reactions to the decline in the portfolio’s size over time. I want to expand on this last point. We cannot and should not prevent Treasury and MBS prices from reacting to relevant economic and financial developments, or indeed from gradually moving over time in response to the progressive decline in the size of the Federal Reserve’s holdings and consequent increase in the amount of securities held by the private sector. In fact, we actively want asset prices to respond appropriately and fully to economic and financial news. Over the coming years, such news could span a wide variety of topics, such as central bank policy in this country and abroad, the ongoing debate over fiscal policy, and the evolution of expectations for the longer-run neutral rate of interest. That said, we do seek to mitigate the risk that our operational actions contribute to unnecessary surprise, disruption, or volatility. I am confident that the FOMC’s plan appropriately manages this risk. Now, confidence doesn’t mean certainty: there is always a risk that events could unfold differently from expectations.
As shown in Panel 10, market participants assign about one chance in four to such a scenario unfolding, so communications about how the FOMC might respond to such an outcome in the future might have the effect of bolstering confidence even today. 12 / 15  BIS central bankers' speeches  Returning to Panel 9, it is notable how much uncertainty there is about the size of the balance sheet, even in the no-zero-lower-bound scenario shown on the left. This likely reflects a few factors: MBS repayments remain uncertain up to the cap; future demand for currency, bank reserves, and non-reserve liabilities is hard to know precisely; and the FOMC has not yet decided on a longer-run framework for the implementation of policy. As a result, it seems appropriate to me that there should be an appreciable amount of uncertainty, which should decline over time as these matters become clearer so long as normalization continues uninterrupted. Conclusion Let me conclude now by reiterating the message of confidence with which I began my remarks. I am confident that the FOMC’s gradual and predictable plan to normalize the balance sheet will reduce the balance sheet’s size at an appropriate pace, that it will promote good market functioning, that it will not disrupt the mortgage market or Treasury debt issuance, and, importantly, that it will mitigate the risk of sharp or outsized asset price reactions.