A top Federal Reserve official on Thursday took an early stab at how the U.S. central bank should reduce its swelled balance sheet to a more normal size in the years ahead, arguing the current plan may need some adjusting.
In a detailed speech to a Hong Kong audience, Philadelphia Fed President Charles Plosser urged a return to pre-crisis monetary policy as soon as possible and warned of a possibly quicker-than-previously-envisioned selloff of assets.
The Fed's unprecedented bond-buying stimulus has boosted its balance sheet to some $3.2 trillion in longer-term securities, raising concerns over how it will return to a more normal level of about $1 trillion without disrupting markets or racking up losses later this decade.
Plosser, an outspoken policy hawk and longtime critic of the bond-buying, said the Fed would be wise to begin swapping maturing longer-term assets with shorter-term ones, aiming to hold only Treasury bonds and not the mortgage bonds it is now buying.
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The ultimate goal, he said, should be to reduce the balance sheet so that the key "federal funds" interest rate again becomes the central bank's main policy instrument. The federal funds rate has been near zero since late 2008 to help drag the U.S. economy out of recession.