HONG KONG, April 11 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
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
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.
"The complexity of shrinking the balance sheet is nuanced,"
Plosser, who is often in the minority of Fed opinion and does
not have a vote this year on monetary policy, told the Market
News International Seminar.
"We are in uncharted territory in this regard and should be
appropriately cautious in specifying too detailed a path that we
may not be able to follow," he said, according to prepared
The Fed published its so-called "exit strategy" from the
extraordinary policies back in mid-2011; Fed Chairman Ben
Bernanke recently said it needs a rethink.
The balance sheet could rise to $4 trillion by year end if
the Fed continues buying $85 billion in monthly Treasuries and
mortgage-backed securities. While the central bank is
transferring large profits to the U.S. Treasury now, it may run
into the red if it sells these assets when longer-term rates
At its March policy meeting, Fed policymakers began
discussing whether it would be best not to sell the assets and
simply let them mature, a decision that could stabilize markets
and curb any politically-sensitive losses.
Shedding further light on where this debate may head,
Plosser warned that excess bank reserves now total $1.8 trillion
and could grow to $2.25 trillion if the ultra easy policies
"That may require the Fed to sell assets at a somewhat
faster pace than contemplated in the principles adopted in
2011," he said.
"This action would heighten the risk that the Fed would be
selling longer-term assets at a loss, which would affect the
Fed's remittances to the Treasury," he added. "There might even
be negative remittances (losses)."
Getting down into the weeds of monetary policy, Plosser said
he didn't want the outsized balance sheet to dissuade the Fed
from its traditional "corridor" system in which the federal
funds rate floats between a lower rate paid on the bank
reserves, and a higher discount rate at which banks can get
He also urged the Fed to increase the discount rate from the
current 0.75 percent to "more normal, or non-crisis, levels."