The U.S. Federal Reserve will likely shrink its vast holdings of mortgage-related and other longer-term securities passively and gradually, a senior Fed official said..
"A decision to shrink the balance sheet more aggressively could be disruptive to market functioning," Brian Sack, executive vice president at the New York Federal Reserve, said Monday in remarks prepared for delivery to the National Association for Business Economics.
The assets will roll off fairly quickly with time, and an aggressive approach to diminishing the Fed's holdings would risk a spike in longer-term interest rates, Sack said.
The Fed is close to completing its scheduled purchases of around $1.7 trillion of mortgage-backed securities, agency debt, and longer-term Treasurys that it launched to boost the economy after cutting rates to near zero.
The Fed has said high unemployment and low inflation make it necessary to hold rates exceptionally low for an extended period.
But with evidence the economy has begun to recover from the worst financial crisis in generations, Fed officials have begun to explain how the U.S. central bank plans to unwind its extraordinary support for the economy.
Some Fed officials argue the Fed should actively sell assets to help steer its tightening of financial conditions.
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