PALO ALTO, Calif., June 24 The Federal Reserve has the tools allow it to tighten monetary policy even with a large balance sheet, a top Fed official said on Tuesday.
"Whether our balance sheet is declining or staying very large doesn't affect in any way the Fed's ability to do what the Fed has to do whenever the economy is in danger of overheating, and that is to take the punch bowl away right when the party is getting too fun," San Francisco Fed President John Williams said at the 20th Annual Stanford Directors' College. When the time comes to raise rates, he added, the Fed will try to do "in a way that's the least disruptive as possible."
The Fed's balance sheet has ballooned to more than $4 trillion, and some critics worry those funds could become tinder for future inflation as the economy heats up. The Fed's ability to pay interest on the excess reserves banks keep at the Fed will prevent such a situation, Williams said.