New York Fed President John Williams hinted at the idea of flexibility in the Fed’s ongoing process of shrinking its balance sheet. In response to the first big Fed commentary since its Wednesday meeting, markets popped but quickly came back down.

“We did not make a decision to change the balance sheet normalization right now but as I said, we’re going to go into the new year with eyes wide open, willing to read the data, and re-assess the economic outlook and take the right policy decisions,” Williams told CNBC on Friday.

More broadly, Williams pledged that the Fed will remain data-dependent on its economic outlook, saying that policymakers are not “sitting there saying we know for sure what’s going to happen” in 2019. Even with the Fed revising down its projections on 2019 rate hikes from three to two, Williams said nothing is for certain.

"This is not a commitment, or a promise, or in any way a sense that we know for sure that’s what we are going to do," Williams said, adding that “things can change between now and next year.”

The Dow jumped by about 280 points before coming back down. As of 11:14am the Dow Jones Industrial Average had added 0.04% to 22,869.38.

On “autopilot”

The commentary comes two days after Fed Chair Jerome Powell raised rates by 25 basis points and insisted that the Fed would continue to allow Treasurys and mortgage-backed securities to roll off the books at a $50-billion-a-month pace.

“I think that the runoff of the balance sheet has been smooth and has served its purpose and I don’t see us changing that,” Powell said, adding that interest rates would continue to be the “active tool of monetary policy.”

Markets reacted negatively to that firm commitment.

But the Fed has been clear about its intention to make interest rates the primary monetary policy tool, not the balance sheet. When Janet Yellen kicked off the balance sheet normalization program in 2017, she insisted that it would function on “autopilot” with no promise of reverting back to quantitative easing unless there were a “sufficient” negative shock to the economy.

But markets could read Williams’s remarks on Friday as a sign that policymakers do have some flexibility in its balance sheet unwind.

“Stop with the 50 B’s”

The balance sheet unwind process, also referred to as “quantitative tightening,” came into focus in the lead-up to the FOMC meeting. The Wall Street Journal penned an opinion piece warning of the unpredictable effects of undoing quantitative easing, prompting President Donald Trump to urge Powell to “Stop with the 50 B’s” and “Feel the market.” Market participants have been worried about the unwind pulling liquidity from the economy.

Morgan Stanley pointed out on Thursday that the negative market reaction to Powell’s commentary on the balance sheet could “have been enough to catch policymakers’ attention and lead them to reconsider their normalization plans.”

But others are not so convinced that the balance sheet is a dominant factor driving markets. Goldman Sachs wrote Friday that if the roll-off of assets were an issue, markets would see an oversupply of mortgage and Treasury bonds, Instead, Goldman’s Marty Young has seen mortgage excess returns in line with the sell-off in equities and saw Treasury bond term premiums fall to negative levels.

“We think Federal Reserve portfolio runoff is a factor, but not the major factor, driving markets,” Young wrote, saying that global deceleration and short term real risk-free rates are the real drivers.

Brian Cheung is a reporter covering the banking industry and the intersection of finance and policy for Yahoo Finance. You can follow him on Twitter @bcheungz.

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