Fed signals it could
promptly start shedding bonds from portfolio this year
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[April 01, 2017]
By Jonathan Spicer
NEW YORK (Reuters) - The Federal Reserve
could begin shrinking its $4.5-trillion balance sheet as soon as this
year, earlier than most economists expect, New York Fed President
William Dudley said on Friday in the central bank's most definitive
comments on the question that looms over financial markets.
The hawkish-sounding assertion temporarily pushed the dollar lower and
raised yields on longer-dated bonds, and added Dudley's influential
voice to at least three other officials at the Fed eyeing a prompt end
to a crisis-era policy.
"It wouldn't surprise me if some time later this year or some time in
2018, should the economy perform in line with our expectations, that we
will start to gradually let the securities mature rather than
reinvesting them," Dudley, a close ally of Fed Chair Janet Yellen, said
on Bloomberg TV.
A couple hours later James Bullard, president of the St. Louis Fed,
repeated his preference for the central bank to begin shedding its
mortgage- and Treasury-backed bonds immediately.
Economists polled by Reuters and by the Fed itself generally expect the
process to start some time next year, a move anticipated to raise market
yields as the world's largest holder of U.S. government debt edges back
from the market.
The Fed amassed the record amount of assets in the wake of the 2007-2009
financial crisis and recession in three rounds of "quantitative easing"
meant to stimulate investment, hiring and economic growth. It is no
longer buying additional bonds, but it is topping up the portfolio when
The Fed's official plan is to begin letting the bonds naturally roll off
- not necessarily sell them - once its interest-rate hikes are "well
underway". That is intended to shrink the portfolio to an unspecified
lower level, though probably not to the pre-crisis level of around $900
Cleveland Fed President Loretta Mester and John Williams of the San
Francisco Fed have also backed shrinking the portfolio this year. But
Dudley, a permanent voting member of the Fed's policy committee, often
paves the way for broader policy decisions and his New York Fed manages
the balance sheet for the central bank.
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The United States Federal Reserve Board building is shown in
Washington October 28, 2014. REUTERS/Gary Cameron
Dudley said the bond run-off would be "passive" and done "in the background,"
though he added that it could influence the pace with which the Fed continues to
"If we start to normalize the balance sheet, that's a substitute for short-term
rate hikes because it would also work in the direction of tightening financial
conditions," he said. "If and when we decide to begin to normalize the balance
sheet we might actually decide at the same time to take a little pause in terms
of raising short-term interest rates."
Neel Kashkari, head of the Minneapolis Fed and among the most dovish
policymakers, acknowledged at a local banking conference that there is interest
among his colleagues to shrink the portfolio "in a gradual and predictable way."
A Reuters poll found that economists at primary dealers were split over whether
the Fed would announce its plans this year or next, with the actual shedding of
bonds some time later. The New York Fed's most recent poll found Wall Street
banks expect no change to the balance sheet until mid-2018.
The central bank hiked rates a notch in mid-March, its second tightening in
three months, and it plans to move about twice more this year according to its
Dudley, in the TV interview, said "a couple more hikes this year would seem
reasonable," and that the Fed could do a little more or less depending on the
Bullard, another dovish policymaker who was addressing a students' conference in
New York, said he could back perhaps one more hike this year but added "this is
not an environment that data is screaming at the Fed that it has to move."
(Reporting by Jonathan Spicer; Additional reporting by Ann Saphir in
Minneapolis; Editing by Chizu Nomiyama)
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