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Fed presenters caution about balance‑sheet risks and AI‑driven market gains while urging slow QT
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Summary
Officials noted the Fed's roughly $6.6 trillion balance sheet and suggested gradually shifting toward short‑term Treasury bills and slowing quantitative tightening; presenters also flagged large equity gains concentrated in AI as a financial‑stability consideration.
Presenters reviewed the Federal Reserve's balance sheet and recommended operational adjustments to reduce maturity mismatches and limit future losses if short‑term yields rise relative to returns on long‑dated holdings.
Presenter (S4) reported the balance sheet at about $6.6 trillion (roughly 22% of GDP) and reserve balances near $2.7 trillion. He described proposals—cited explicitly in the transcript as suggested by governor Waller—to increase holdings of short‑term Treasury bills to better match liabilities and reduce interest‑rate mismatch risk.
Presenters also discussed unusually strong equity market gains concentrated in AI‑related firms (the Nasdaq was reported up roughly 25% year‑to‑date) and the potential wealth effect that could loosen financial conditions. "When this bubble keeps expanding…stock prices could fall, household wealth drops, consumption drops, and this could lead to a further deteriorating labor market," Presenter (S1) warned when discussing downside risks from a potential correction.
To balance these concerns, presenters recommended slowing quantitative tightening to keep additional liquidity in the banking system as a buffer against tariff or other shocks; they emphasized the change would be gradual and contingent on how markets and the economy evolve.
The committee recorded these recommendations as part of the rationale for maintaining a restrictive policy stance while managing operational balance‑sheet risks. The transcript includes discussion but no binding operational decision recorded beyond the stated recommendation to slow QT and replace longer‑term assets with short‑term Treasury bills.
