Such capacity may be a concern given the risk that a more normal portfolio size and composition may not be reached before an adverse shock brings short-term rates back to their effective lower bound, perhaps warranting renewed balance sheet expansion.41 This risk may be particularly pronounced in a low neutral rate environment. In principle, asset sales could accelerate normalization of the size and composition of the balance sheet, but the market effects of longduration asset sales could be uncertain, and sales could affect the path of short-term rates.42 Moreover, a central bank that does not hold the assets it has purchased as long as market participants anticipate could lose credibility, making future asset purchases less effective. The central bank must therefore consider the effects of its balance sheet actions in the context of the overall monetary policy setting, including the interplay between changes in the balance sheet and changes in interest rates. Uncertainties related to this relationship help to explain the FOMC’s choice to make changes in overnight rates its main tool for adjusting the stance of monetary policy in the normalization process while balance sheet normalization runs in the background. Still, having both instruments in the central bank’s toolkit raises the importance of clear and cohesive communications about their respective use. Lesson 7: Operational flexibility is important As I noted earlier, the Fed successfully adapted its operating regime to be able to control interest rates even with a large balance sheet.

Some key examples already underway include recalibrated regimes for digital bank and digital insurers as well as our collaboration with the Securities Commission on digital assets. We have also collaborated with Malaysia Digital Economy Corporation on ‘fintech booster’, a programme that aims to provide capacity building resources for companies to develop fintech solutions, including legal and compliance support. These initiatives are in line with our regulatory efforts to remove undue barriers to competition and innovation, as well as address market failures. Third, alternate forms of capital will be key in supporting the holistic and broader growth of businesses, including start-ups. Specifically, alternative finance instruments, such as venture capital (or VCs) and peer-to-peer lending, can help fill the funding gap for early stage and growth stage firms, who typically possess risk profiles less suited for bank-based debt financing. Alternative finance instruments can also help crowd-in additional capital from other large private and public capital providers, enabling firms to support their subsequent stages of growth, as well as foster a greater culture of innovation, dynamism, and entrepreneurship in the Malaysian economy. At present, the domestic alternative finance industry is still nascent. According to our estimates, 3/4  BIS central bankers' speeches  Malaysia’s alternative finance market size constitutes only 0.2% of GDP, which is small when compared to developed and peer markets. Realising the need to accelerate growth of this area, we have identified several strategies to develop alternative finance under the Financial Sector Blueprint 2022–2026.