large balance sheet, and thereby judge how patient it could afford to be in reducing the balance sheet to its longer - run level. 7 reducing the balance sheet ’ s size over the past year, as the fomc came to judge that normalization of the policy rate was well under way, with another rate increase in december 2016, and further increases in march and june 2017, fomc deliberations turned to how balance sheet normalization might best be done. as i noted earlier, for some time the fomc has underscored that the balance sheet will be reduced in a way that is gradual and predictable, so as to avoid risks of surprise, disruption, or volatility, and would be achieved primarily by not reinvesting maturing principal. the fomc ’ s recently initiated plan does exactly this. 8 principal reinvestment will decline in a phased manner, an approach which provides for an appropriate pace of reduction in the balance sheet, and is quite straightforward to communicate. specifically, principal maturities will be reinvested only to the extent that they exceed gradually increasing caps. 9 for treasuries, the cap initially will be $ 6 billion per month, and will increase in steps of $ 6 billion at three - month intervals over 12 months until the cap reaches $ 30 billion per month. agencies follow a similar pattern, with a cap starting at $ 4 billion and rising in three - month steps to reach $ 20 billion. the fomc also indicated that it anticipates that these caps will remain in place once they reach their respective maximums. over time, as the fed holds fewer securities, the private sector will gradually hold more. at the same time, fed liabilities held by the private sector, in particular reserve balances, will decline equivalently. panel 2, which draws on a july 2017 update to the system open market account annual report, illustrates how the caps will evolve in relation to anticipated maturities of treasuries, on the left hand side, and agency mbs on the right. as can be seen, once the caps are fully phased in, in many months the caps are not expected to be binding, and so there would be no reinvestments 3 / 7 bis central bankers'speeches in those months. however, the caps will be exceeded in months with large treasury maturities, and we would reinvest the amount above the cap. for agency mbs, a change in conditions could

might face circumstances similar to bear stearns. lehman brothers was one of these dealers. it is impossible to know what would have happened to lehman without the tslf and the pdcf, but it is safe to say that these facilities calmed markets and allowed lehman and others more time to examine available options and to seek potential solutions. as history shows, lehman had six months from the date of the bear stearns transaction to find a longterm solution to its myriad problems. of course lehman ’ s challenges were very serious – it suffered from capital deficiency, liquidity drain and a low level of market confidence. any of these three could potentially prove fatal to a publicly traded financial company, even in the healthiest of economies. lehman had the misfortune of trying to solve all three at once. with the introduction of the tslf and the pdcf, the new york fed sent small teams of two monitors into each of the four remaining investment banks, goldman sachs, merrill lynch, morgan stanley and lehman brothers – something it had never done before. let me again emphasize that we were not intending to conduct supervisory activities with our personnel, nor were we attempting to displace the sec, the primary regulator of the investment banks. to the contrary, we were acting as a potential lender to these potential borrowers, and we wanted to know our new borrowers better. because of concern that our monitoring role could be misunderstood or misconstrued, vice chairman donald kohn described our objectives in public testimony. he said that the on - site monitors had two narrowly tailored goals : ( 1 ) to ensure that any credit that the fed extended to the investment banks would be repaid, and ( 2 ) to ensure that the investment banks did not become too dependent upon federal reserve credit and would continue to work on improving their liquidity positions and financial strength. 2 the federal reserve monitors did not take on the broader responsibility of mary l. schapiro, chairman, u. s. securities and exchange commission, testimony concerning the lehman brothers examiner ’ s report, before the united states house of representatives committee on financial services, april 20, 2010. donald l. kohn, vice chairman, board of governors of the federal reserve system, risk management and its implications for systemic risk, before the subcommittee on securities, insurance, and investment, committee on banking, housing, and urban affairs, united states senate, june 19, 2008. supervising lehman. the sec continued to be the supervisor of