Fed considering policy shift on Treasury holdings

WASHINGTON Tue Apr 6, 2010 3:07pm EDT

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WASHINGTON (Reuters) - The Federal Reserve is considering allowing maturing Treasury bonds to roll off its portfolio as an alternative way to drain reserves from the banking system, according to minutes from its March meeting.

The move would mark a shift from the current policy of reinvesting the proceeds from government debt into new Treasury bonds as the old ones come due.

This would serve as an additional tool for removing the extraordinary stimulus the Fed injected into the banking system in response to the worst financial crisis since the Great Depression.

"Redeeming all of its maturing Treasury holdings would significantly reduce the size of the Federal Reserve's balance sheet over coming years and hence could be helpful in limiting the need to use other reserve draining tool such as reverse repurchase agreements," the minutes said.

Many economists, including some key Fed officials, worry about whether the large amount of excess reserves now sloshing around the banking system will dampen the central bank's ability to tighten policy effectively.

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