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* No decision yet on ultimate size of balance sheet
* In testimony, Yellen rejects raising inflation target
* Fed chair backs naming community banker to board
By Jonathan Spicer and Tim Ahmann
NEW YORK/WASHINGTON, May 8 The U.S. Federal
Reserve is in no rush to decide the appropriate size of its
balance sheet, but if it ultimately shrinks it to a pre-crisis
size, the process could take the better part of a decade, Fed
Chair Janet Yellen said on Thursday.
Yellen, in testimony to a Senate panel, said no decision had
yet been made on the central bank's portfolio of assets, which
has swollen to $4.5 trillion from about $800 billion in 2007.
Three rounds of asset purchases meant to stimulate the
economy in the wake of the 2007-2009 financial crisis have
boosted the balance sheet to this record level. Unsatisfied with
the U.S. recovery, the Fed is still adding $45 billion in bonds
each month, though the purchases should end later this year.
Yellen said the portfolio should start to shrink once the
Fed decides to raise near-zero interest rates.
"We've not decided, and we'll probably wait until we're in
the process of normalizing policy to decide, just what our
long-run balance sheet will be," she told lawmakers, adding it
will be "substantially lower" than it is now.
While the central bank could sell the mortgage-based bonds
it has accumulated, in the past it has telegraphed that it would
more likely simply stop re-investing funds from expired assets
and then, over years, let the assets run off the balance sheet
"If we do that and nothing more, it would probably take
somewhere in the neighborhood of five to eight years to get it
back to pre-crisis levels," Yellen said of halting
It was the Fed's most explicit time frame yet for the
delicate task of shrinking its balance sheet to a more normal
level. The massive portfolio has sparked worries that, once the
Fed starts to raise rates, inflation will shoot up. The Fed
could also absorb losses if it decides to sell assets in the
years ahead, a potential political headache for Yellen.
The five-to-eight-year timeline generally aligns with
estimates of both private economists and a paper published last
year by top Fed economists. A paper by JPMorgan economists
predicts shrinking the Fed's portfolio would take seven years.
A COMMUNITY BANKER FOR FED BOARD
Yellen, in her second day of testimony before lawmakers,
again stressed that excessivly low inflation drags on economic
growth. But she rejected the idea, floated by some private
economists, of trying to boost inflation above the Fed's
2-percent target to ratchet down unemployment, saying it was
critical to keep inflation expectations firmly anchored.
Inflation has been running just above 1 percent in the
world's biggest economy while unemployment, albeit falling, is
still elevated at 6.3 percent.
Asked repeatedly about fiscal policies, Yellen took a page
from her predecessor Ben Bernanke and urged the Congress to
address the nation's long-term budget challenges, warning that
the current course was unsustainable.
"We can see that going out 20, 30, 50 years without some
further shifts in fiscal policy, it's projected that the ratio
of debt to GDP will rise to unsustainable levels," Yellen told
the Senate Budget Committee.
"I would join my predecessor in saying that I do think it's
important that the Congress address that issue," she said,
adding recent tightening of fiscal policy had been one of the
"headwinds" that had undercut the Fed's efforts to foster a
stronger economic recovery.
In another exchange, Angus King, an independent from Maine
who caucuses with the Democrats, asked Yellen if she would favor
the addition of a community banker to the Fed board, which
currently has only four of its seven seats filled.
"Certainly I am in favor of that," Yellen said, noting
recently retired governors Elizabeth Duke and Sarah Bloom Raskin
were very familiar with small banks. The Fed governor said she
had conveyed her desire for a community banker on the Fed board
to the White House, which nominates central bank governors.
Reuters reported last month that the White House was
considering a former banking lawyer, as well as two others with
direct community-banking experience, as possible nominees to the
depleted Fed board.
(Writing by Timothy Ahmann; Editing by Chizu Nomiyama)