In particular, central banks have had little direct experience with the impact of such a reduction in holdings of domestic securities and in reserves. One relevant experience, of course, was the socalled “taper tantrum,” in 2013 which showed that markets can have outsized reactions to changes in balance sheet policy even before they happen. More generally, experience with asset purchase programs, both here and abroad, clearly demonstrates that market volatility can ensue from balance sheet policy changes that market participants perceive as surprising, unclear, or rapid, or are not adequately distinguished from short-term interest rate policy intentions. All of this indicates to me that, at policy turning points like these, central banks should carefully and clearly communicate their intentions, provide as much transparency as possible, focus on one tool at a time, and make transitions in policy implementation as slowly as overall macroeconomic policy objectives permit.4 The rest of my remarks will go as follows. First, I’ll provide an in-a-nutshell summary of the structure of the Federal Reserve’s balance sheet. Then, I will discuss why it is important that the decline in the balance sheet be gradual and predictable, and explain how the FOMC’s plan provides this gradualism and predictability. I will then talk briefly about how the Federal Reserve is ensuring it is prepared for unexpected developments. We will then open things up for questions you may have. The Fed’s balance sheet, in a nutshell Let’s begin by reviewing, at a high level, where the Fed’s balance sheet is today.

An overly fast redemption flow of Treasuries could also create challenges in the government’s management of public debt auctions and result in communication challenges.12 Rapid portfolio declines also could have unforeseen impacts on overnight money markets, for example by creating significant shifts in dealers’ demand for overnight repo financing. We have seen such impacts in the past. This sort of volatility did not, and would not now, pose a major problem to markets or policy implementation, but it is something worth avoiding if possible. Rapid portfolio runoff could also make it more likely that bank reserves become scarce unexpectedly or more quickly than policymakers had anticipated. Finally, overly fast portfolio runoff could introduce undesired noise into financial conditions. This could complicate policymakers’ economic forecasting and make it more challenging to determine and communicate the appropriate monetary policy stance. Predictability Predictability complements gradualism by promoting stability in market estimates for the future size of the balance sheet, and confidence that the FOMC will not unintentionally create market stress. It involves assuring the public that the flow of balance sheet reduction remains gradual across a range of economic scenarios, including ones quite different from our central forecast. Achieving predictability is complicated by uncertainty about agency MBS principal repayments, an issue I’ll summarize briefly. To an extent, unexpected changes in the pace of existing home sales contribute to uncertainty about MBS repayments. But by far the greatest source of aggregate uncertainty relates to refinancing.