“To ensure a smooth transition to the longer-run level of reserves consistent with efficient and effective policy implementation, the (FOMC) Committee intends to slow the pace of the decline in reserves over coming quarters provided that the economy and money market conditions evolve about as expected.  (US Fed Press Release, Balance Sheet Normalization Principles and Plans, March 20, 2019)

“The (FOMC) Committee decided to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent.  The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes. The Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes.” (US Federal Reserve, FOMC Statement, May 1, 2019)

Central bank monetary policy is managed through changes in the size and the composition of their balance sheets.

In normal periods of stability (i.e. pre-2008), interest in central bank balance sheets tends to wane, as the policy focus from the financial markets is mostly on interest rates.

However, the 2008-09 financial meltdown changed the attention focus. In their efforts to limit the negative effects of the 2008-09 world recession, the major central banks massively bought a wide range of financial assets in order to support their local economies as well as to improve macro economic and financial stability.

Indeed, the global expansion of central bank balance sheets since 2008 was unprecedented and the Fed and the ECB used balance sheet expansions to prevent what could have been an even worse crisis.

Even so, the Fed and the ECB are both uncomfortable about the longer-term implications of having such large balance sheets. Indeed, both central banks were recently engaged in a program of shrinking their balance sheets, but that program has stalled because of concerns of a global slowdown in 2019 and 2020,

Exit strategies from these enlarged balance sheets will continue to be an issue that will pre-occupy central banks for some years to come.

In the case of the US, the Federal Reserve introduced its quantitative easing approach shortly after the Great Recession and in October 2017 began unwinding its balance sheet under a quantitative tightening approach. (Quantitative easing adds money into the banking system, while tightening drains money from the banking system.)

At its May 1st policy meeting, the US Fed officials agreed that their current patient approach to setting monetary policy could remain in place “for some time,” a further sign that policymaker see little need to change interest rates in either direction.

“Members observed that a patient approach...would likely remain appropriate for some time, with no need to raise or lower the target interest rate from its current level of between 2.25 and 2.5 percent” (Minutes of the central bank’s April 30-May 1 meeting.)

While Fed officials have largely downplayed the trade dispute as a short-term problem, they have of late begun discussing the risks if the tariffs and trade tensions persist and begin to reshape global supply chains and pricing. Nonetheless, the Fed's overall assessment of the economy is more upbeat than it was earlier this year.