May 21, 2014 / 8:05 PM / in 4 years

Fed's Williams 'gun shy' on shrinking balance sheet-WSJ

May 21 (Reuters) - The Federal Reserve should defer any decision to allow its balance sheet to shrink until after it has begun raising interest rates from their current near-zero level, San Francisco Fed President John Williams told the Wall Street Journal on Wednesday.

Williams’ comments follow similar remarks by the influential head of the New York Fed, William Dudley. Together, the remarks are a strong signal the U.S. central bank is inclined to keep its $4-trillion balance sheet large for longer in order to minimize the risk of roiling markets.

The Fed currently reinvests proceeds from maturing Treasuries back into its portfolio, and for years had said it would start normalizing rates by ending those reinvestments in a step that would precede its first rate hikes. Williams, like Dudley, said he worries that stopping reinvestments could disrupt markets, presumably by setting off a run-up in market rates that the Fed would view as undesirable.

“I‘m a little gun shy about removing the reinvestment thing and hoping everybody understands that represents no shift in the view on the funds rate,” Williams told the Wall Street Journal.

Williams believes the Fed should not start raising rates until the second half of next year. (Reporting by Ann Saphir; Editing by Chris Reese)

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