encourage faster mbs repayments than are shown here, producing monthly paydowns larger than the 20 billion cap and thus some reinvestments — an issue i will return to later. policymakers have indicated that they want the portfolio ’ s size to decline “ in the background, ” and that the federal funds rate will be the primary instrument of monetary policy. balance sheet normalization is expected to continue until the fomc judges that the federal reserve is holding no more securities than necessary to implement monetary policy efficiently and effectively. the fomc has not specified how large the balance sheet should be at that point, other than an expectation that the level of reserve balances will be appreciably below that seen in recent years, but larger than before the financial crisis. my colleague lorie logan spoke in may on the many technical drivers of this ultimate level, which include the mode of policy implementation that the fomc chooses in the longer run, possible increases in recent years in the financial system ’ s demand for reserves and federal reserve reverse repo liabilities owing to new financial regulations and other factors, and the long - term evolution of demand for paper currency. 10 let me spend a few minutes discussing the importance of gradualism and predictability. gradualism the case for gradualism in reducing the fed ’ s securities holdings rests on evidence, as well as potential risks, that an overly fast flow of securities into private hands could be disruptive to market functioning, as well as the fomc ’ s confidence that it can adjust its policy stance as needed through changes in the federal funds rate. in particular, there is evidence that the agency mbs market, due to the nature of its trading conventions, is prone to dislocation when market participants expect large transitions in central bank agency mbs flows. 11 such concerns can be self - fulfilling : if market participants are concerned that an abrupt shift in flow might be disruptive, they might, for example, withdraw from liquidity provision. 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

reduce or eliminate residual holdings, and that the timing and pace of any sales would be communicated to the public in advance. portfolio projections released in july 2017 do not include sales of any type over the forecast horizon. 9 statement regarding reinvestment in treasury securities and agency mortgage - backed securities, september 20, 2017. 10 logan, implementing monetary policy : perspective from the open market trading desk, may 18, 2017. 11 kandrac, the costs of quantitative easing : liquidity and market functioning effects of federal reserve mbs purchases ( 2014 ). 12 the treasury borrowing advisory council considered this topic in its third - quarter 2017 meeting, including the potential impact of changes in central bank policy abroad. see the august 1, 2017, presentation by tbac to the u. s. treasury. 13 in addition to these topics, we at the federal reserve are following closely the potential for the decline in the balance sheet to affect other aspects of the structure of financial markets or the banking industry. as one example, we are paying attention to the possibility that a decline in the size of the balance sheet puts downward pressure on bank deposits. as discussed earlier, in general, balance sheet normalization removes an asset from the private sector that can be held only by banks ( reserves ) and replaces it with an asset that can be held by anyone ( securities ). it is possible that, on net in equilibrium relative to a counterfactual in which the balance sheet does not decline, ( a ) banks will hold fewer reserves ; ( b ) banks will offset some of this decline by holding securities instead, and some by taking in fewer deposits ; and ( c ) non - banks will replace those deposits with securities. the extent ( if any ) of any such decline in deposit activity on deposit and loan pricing will likely depend on a variety of factors, including the extent to which the decline comes from wholesale institutional deposit activity motivated by interest rate arbitrage. see ihrig, mize, and weinbach, how does the fed adjust its securities holdings and who is affected?, september 22, 2017 7 / 7 bis central bankers'speeches