Successive FOMC minutes recorded debates over how far these developments might reflect the impact of falling reserves levels and balance sheet normalisation more broadly. For the FOMC’s current Balance Sheet Normalization Principles and Plans, see https://www.federalreserve.gov/monetarypolicy/policy-normalization.htm 22 The larger and more volatile gap between total assets and the central bank reserves funding them in the US reflects a more important role for non-reserves liabilities, including banknotes (which account for over 40% of the balance sheet, reflecting global demand) and government deposits. 21  13  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx  13  Published Federal Reserve analysis and policymakers’ discussion23 suggested that reserves remained clearly in the ‘ample’ zone, and ascribed upwards pressure on short-term interest rates to unrelated factors, including the changed pace of Treasury bill issuance and changing dynamics in the repo market. Nevertheless, in light of broader economic and financial conditions, the FOMC decided to announce a somewhat earlier end-date for normalisation than market participants had been expecting at the start of QT. That is expected to leave reserves initially ‘somewhat above the level … necessary to efficiently and effectively implement monetary policy’. Reserves will then be allowed to decline gradually to that level over time, as currency and other non-reserve liabilities grow. Chart 12: US short-term interest rates since 2014  Source: Bloomberg and Bank calculations  In our Discussion Paper, we described a somewhat different approach to handling the uncertainty intrinsic to estimating reserves demand.

This is the approach  20  https://www.bankofengland.co.uk/-/media/boe/files/report/2019/response-to-the-future-of-finance-report.pdf 12  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx  12  adopted by the US Federal Open Markets Committee (FOMC).21 The assets of the Federal Reserve have fallen by over $ since US QT began in autumn 2017 – and US reserves are now more than 40% below their 2014 peak (Chart 11).22  Chart 11: QE and QT in the United States  Source: FRED, Federal Reserve Bank of St Louis  We know from our own experience that this ample reserves floor system can be an effective way to deliver unconventional monetary policy whilst also maintaining control of interest rates. It is particularly suited to the US context, where the supply of reserves is subject to relatively large day-to-day variation as government deposits with the central bank and other items fluctuate. But a key implication of this approach is the need to maintain an estimate of when reserves will become scarce, in order to keep reserves supply well above that level. As we have seen, this estimate is intrinsically uncertain. The market impact of the early stages of US QT was extremely smooth, assisted by clear communications in advance about the way in which the Federal Reserve’s assets would run off progressively over time. But risky asset prices began moving more sharply in the later part of 2018 and into 2019, and there was persistent upward pressure on some short-term money market rates relative to official rates (Chart 12).