first changes, as well as expectations for the date of that change. as can be seen, balance sheet normalization started slightly earlier than expected, both in rate terms – it began with the federal funds rate at 1. 16 percent – and, more notably, in terms of the absolute date. but at the same time, earlier in the year, many market participants had seen decent odds that the federal reserve would reduce its balance sheet more quickly with a full - stop end to reinvestment. panel 7 shows the decline in expectations for both no change in treasury reinvestments and a hard - stop in them. it seems likely that these shifts in expectations came as the fomc ’ s communications became increasingly granular, particularly after the june meeting at which the fomc provided detail on its balance sheet normalization plan. on net, it seems likely that expectations for the federal reserve ’ s overall stock of asset holdings were fairly stable over this time, despite variation in expectations for the timing and pace of eventual declines. under the “ stock view, ” this stability in expected future asset holdings should result in limited changes in asset prices, as has been observed. of course, as the balance sheet shrinks, some upward pressure on rates should be realized. market participants ’ estimate of this effect over two years is shown in panel 8. 11 / 15 bis central bankers'speeches one last possible explanation for the stability of longer - term interest rates amid the movement toward balance sheet normalization has been the fomc ’ s clear message that it would be prepared to use its full range of tools, including altering the size and composition of its balance sheet, if future economic conditions were to warrant a more accommodative monetary policy than can be achieved solely by reducing the federal funds rate. panel 9 shows the average of survey respondents ’ probability distributions for the balance sheet ; the left side shows this for the scenario where overnight rates remain away from zero, and the right side shows the adverse scenario in which they do return to zero. the right side shows a significant expansion in the balance sheet. as shown in panel 10, market participants assign about one chance in four to such a scenario unfolding, so communications about how the fomc might respond to such an outcome in the future might have the effect of bolstering confidence even today. 12 / 15 bis central bankers'speeches returning to panel 9, it is notable how much uncertainty there is about the size of the balance sheet, even

term rates by “ reaching for yield ” into longer - dated maturities, and reverse this effect when short - term rates rise. these effects can be even larger when balance sheet policies are in active use. 24 as a result, a shock to expectations of the central bank ’ s reaction function can lead to outsized movements in longer - term rates. the fomc ’ s current approach entails a much clearer delineation of the roles of the federal funds rate and the balance sheet, breaking the link that appeared in the spring of 2013 : the association between a reduction in the balance sheet and a shock to expectations for the federal funds rate. as shown on panel 5, even with the active discussion of balance sheet normalization in the march and may 2017 fomc meeting minutes, market participants attributed very little of the movement in longer - term rates to communication from the fomc regarding potential changes in their reinvestment policy. it ’ s also possible that it is especially important for the fomc to act in a gradual and predictable way at times when investor response to federal reserve announcements might not be expected to follow predictions that come from economic models that assume rationality, perfect information, expectations for continuously optimal policymaking, and so on. george soros ’ s theory of reflexivity might be instructive here. soros ’ s framework is based on two propositions : fallibility, which means that market participants ’ views of the world can never perfectly correspond to the actual state of affairs ; and reflexivity, which means that these imperfect views can influence the situation through the actions of those who hold those views. 25 in other words, perception might not correspond to reality, but perception can influence reality. taking this to the monetary policy context, expectations for disruption or volatility from an substantial change in the federal reserve ’ s operational posture, even if totally unfounded, could bring about disruption, as the holders of those expectations act to protect themselves or profit from what they believe is likely to come. the solution is to try to avoid generating such expectations for disruption to begin with, by acting gradually and predictably. 10 / 15 bis central bankers'speeches another potential explanation for the relative stability of longer - term rates this time around is that balance sheet news this year, taken together, just hasn ’ t been all that surprising to market participants. panel 6 shows market participants ’ expectation for the level of the federal funds rate that would prevail when the reinvestment policy