"It may take the Federal Reserve nearly a decade to bring its massive balance sheet back toward a more historically normal size, Goldman Sachs economists argue in new research.Forecasters at the firm say that if the Fed presses forward with its expected path of stimulus and continues to buy Treasury and mortgage bonds through the third quarter of 2014, it is unlikely that its balance sheet will get back toward a historical norm of around 6% of GDP until 2022.The Goldman note argues the most likely path for the Fed is that what is now a balance sheet of just over $3 trillion will top out at around $4 trillion when the Fed feels confident enough about the outlook to end its ongoing and currently opened ended campaign of bond buying. The bank expects the Fed to contract its balance sheet by allow its holdings to mature instead of actively shrinking its holding via sales."
We've talked about this being a Great Unknown for a couple of years. Ironically, Minneapolis Fed President Kocherlakota, who has undergone several chameleon-like changes in his evaluation of QEs, wrote back in 2011,
"In the Stern book, the authors quote Minneapolis Fed President Narayana Kocherlakota as saying that the Federal Reserve's balance sheet in twenty years will likely still have $250 billion of mortgage backed securities on the books. Unwinding the Fed's $2 trillion balance sheet will not be easy, as we've written about before."Note that Kocherlakota was talking about unwinding a balance sheet half the size of the peak balance sheet postulated by Goldman Sachs. The GS comments about the Fed letting MBS and CMBS securities mature versus selling deserves some explanation. Clearly, all the experts in this field are peering into the unknown, as the markets move blithely forward. Does this remind you of another period running up to 2006?