REFILE-UPDATE 1-Fed's balance sheet 'exit strategy' needs refreshing -Williams

Thu Feb 20, 2014 12:01pm EST

By Jonathan Spicer

NEW YORK Feb 19 (Reuters) - The U.S. Federal Reserve should update its longer-term "exit strategy" for winding down its swollen balance sheet to reflect changes in the plan since it was published in 2011, a top Fed policymaker said on Wednesday.

"It would be good to update this," San Francisco Fed President John Williams told reporters when asked about refreshing the strategy. "When the world changes, we have changed our plan in an appropriate way."

He also said the U.S. central bank has made clear, for example, that it does not intend to sell any of the assets it has bought until perhaps "later on" as it looks to shrink the balance sheet.

The balance sheet is worth more than $4 trillion and counting after three rounds of asset purchases meant to stimulate U.S. hiring and economic growth in the wake of the 2007-2009 recession. It is now adding $65 billion worth of bonds each month, though it intends to keep trimming the pace of purchases to reflect a stronger economy.

In 2011, the Fed surprised some observers when it published the so-called exit strategy for returning its balance sheet to a more normal level of closer to $1 trillion in the years ahead, and it formally reviewed that strategy in 2013.

According to the published plan, the Fed would halt reinvestment of principal; then modify forward guidance on interest rates; then raise policy target using the rate paid on excess bank reserves; then possibly sell agency-backed securities.

"Now that we're a couple years later, I think it would be useful" to update the strategy as Fed policymakers come to an agreement on the needed changes, Williams said. Changes may be needed around timing of the holdings and the potential for asset sales, he added.

"I think we have since made clear that we have no intention to sell assets as part of the exit strategy except for later on, and in fact we're going to allow the assets to roll off naturally as they mature, or are pre-paid" in the case of mortgage-backed securities, Williams said.

"I see it as a snapshot. Here's how we're thinking. This is our plan."

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A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

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