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Even if you’ve only casually followed news related to the Federal Reserve, you’ve likely encountered this piece of hard-to-decipher jargon: “balance-sheet normalization.”

After all, Fed Chairman Jerome Powell referenced it 30 times at the Fed’s January press conference.

But even though it’s hard to find a dictionary that translates what central bankers say into everyday English, this isn’t a topic to ignore. While most consumers focus on how the Fed impacts borrowing costs, this wonky term has major implications for the U.S. economy, monetary policy and your pocketbook.

Here’s everything you need to know about the Fed’s balance-sheet normalization process, including what it is, why it’s important and what it means for you.

The 30,000-foot view

More broadly, “balance-sheet normalization” refers to the Fed’s recent efforts to sell off the huge holdings of assets it bought a decade ago to keep the economy afloat during the financial crisis.

In November 2008, then-Fed Chairman Ben Bernanke faced a financial panic. The Fed reduced interest rates to virtually zero, but that still wasn’t enough to jump-start an economy suffering its worst turmoil since the Great Depression.

To inject more life into the financial system, the Fed turned to unconventional and unprecedented measures: It started buying long-term Treasuries, debt and mortgage-backed securities to “increase the availability of credit” for home purchases and prop up the economy, according to a Fed statement from 2008.

These purchases were dubbed “quantitative easing,” or QE, by financial experts. The Fed, however, prefers “large-scale asset purchases,” says Joe Pavel, senior media relations specialist at the Board of Governors of the Fed.

Fast-forward to 2019: The Fed is gradually selling off those holdings because the economy has healed and is growing at a healthy rate. The sale of these bonds is referred to as “quantitative tightening.”

What does QE have to do with the balance sheet?

You probably have an idea of debts you owe, such as student loans, credit cards or a mortgage. In accounting terms, those are considered liabilities. In contrast, the things you own — stocks, bonds or a house, for example — are considered assets.

The U.S. central bank, too, keeps track of its assets and liabilities. It publishes this data in a weekly financial statement known as “the balance sheet.”

U.S. paper currency, as well as money that commercial banks hold in accounts at the Fed, are counted as a liability. Assets, on the other hand, are things that the Fed has purchased, such as Treasuries.

Now, go back to 2008. When the Fed announced it would start buying massive amounts of bonds, including “subprime” mortgage securities and other forms of distressed debt, it listed them as “assets” on its balance sheet.

This caused the balance sheet to balloon. In August 2007, before the financial crisis hit, the Fed’s balance sheet totaled about $870 billion. By January 2015, after those large-scale asset purchases occurred, its balance sheet had swelled to $4.5 trillion. That’s more than a fivefold increase.

Before these measures, people weren’t interested in the Fed’s finances, says Kenneth Kuttner, a professor of economics at Williams College who has researched unconventional monetary policy.

“It was the most boring thing in the world, like watching paint dry,” Kuttner says. “Quantitative easing changed all that.”

Why did the Fed turn to this?

To know why the Fed took such drastic measures to revive the economy, it’s important to remember the goal of the central bank: ensuring stable prices and maximum employment.

Traditionally, the Fed influences the pace of economic growth by adjusting its key short-term interest rate known as the federal funds rate, which determines how much it costs banks to borrow and lend to each other overnight.

When the economy needs a little bit of help, the Fed can make credit less expensive. That prompts businesses to invest more in themselves and add jobs. Cheaper borrowing costs also gives consumers an incentive to purchase cars and homes on credit. But if the economy grows too quickly, the Fed can raise interest rates to avoid it overheating, which also makes it more attractive to save.

The Fed can also manipulate the short-term interest rate by buying and selling U.S. government bonds, notes and bills, which are added to its balance sheet.

But as the financial crisis worsened, and the Fed slashed interest rates to virtually zero but the economy was not revived, the Fed decided it needed to do more. That’s when it started to buy Treasuries and mortgage-backed securities on the open market. The sellers of these securities, such as big banks, the Fed reasoned, would use the cash from the sales to boost lending and reinvest in their businesses.

It’s been a decade since the financial crisis. What’s the Fed doing now?

The economy is in far better shape compared with a decade ago.

Unemployment is near a 50-year low. Employers added more than 300,000 jobs in January, even amid a government shutdown and uncertainties related to the U.S.-China trade conflict. Inflation is tame, just below the Fed’s 2 percent target. And if the economy keeps growing come midyear, we’ll officially be in the longest expansion on record.

When the Fed announced these unconventional measures a decade ago, it said it would reduce its holdings back to the normal, pre-crisis level once the economy started to recover. Enter the term “normalization.”

The Fed began reducing its fixed-income holdings in October 2017, and now its balance sheet is just above $4.026 trillion.

What should consumers keep their eyes on?

There’s just one problem: The asset purchases were so unprecedented that Wall Street investors are worried that the economy may suffer harm and grow more slowly if the Fed reduces its holdings too aggressively, which takes money out of the financial system and amounts to policy tightening.

“Where’s it going to end — $2 trillion? $1.5 trillion? There’s no good sense where the ultimate destination is,” says Kuttner, referring to the final size of the Fed’s balance sheet when its normalization process is complete.

To ease investors’ fears, policymakers at the Fed issued a separate statement about the normalization process at their January rate-setting meeting, essentially giving themselves room for flexibility. The FOMC is “prepared to adjust any of the details for completing balance sheet normalization in light of economic and financial developments,” the statement read.

Indeed, there are still many unknowns when it comes to the Fed’s balance sheet normalization plan.

It’s like “going into a forest that hasn’t been mapped before,” says Mark Hamrick, Bankrate’s senior economic analyst. The Fed “wasn’t sure what they’d find on the way in, and getting out of the woods is similarly fraught with unknowns.”

The process of the Fed unwinding its asset purchases isn’t risk-free. Just as interest rates typically fall when reserve supplies increase, the central bank risks lifting borrowing costs as it decreases reserves.

That could be a challenge for U.S. central bankers, who already voted to raise interest rates four times last year based on economic measures alone, Kuttner says.

“If that’s the case, then maybe monetary policy is a bit more contractionary than indicated by the fed funds rate,” which is still historically low, Kuttner says.

But policymakers indicated at the January FOMC meeting that they would be “patient” before lifting borrowing costs again, voting to leave the federal funds rate in a range of 2.25 percent to 2.5 percent as they judge the impact of prior rate hikes.

What should consumers’ next steps be?

This uncertainty underscores the importance of building an emergency savings fund, Hamrick says. Investors, meanwhile, should brace for market choppiness as the Fed figures out this process.

“Some of the volatility that we saw in financial markets toward the end of 2018 is an indication of what can go wrong if the Fed makes a policy mistake,” Hamrick says. “The worst of that may be behind. But whether anticipating an economic slowdown or market volatility, think about your long-term plans, including retirement and emergency savings.”

The bottom line: Embrace the unconventional.

“Consumers, investors, savers and borrowers should think about this (quantitative easing) as one of the two main tools in the central bank’s toolbox to help adjust the strength of the U.S. economy,” Hamrick says. “It remains to be seen how the Fed will learn how best to employ it and whether there are unintended negative consequences from having invented and deployed it.”

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