U.S. Markets

Harker, joining chorus, says Fed could trim bond portfolio this year

PHILADELPHIA (Reuters) - The Federal Reserve could begin shrinking its portfolio of bonds as soon as this year, Philadelphia Fed President Patrick Harker said on Monday, adding his voice to a growing number of colleagues warning they could promptly wind down a crisis-era policy.

“Possibly by the end of this year or the beginning of next year would be an appropriate time to stop reinvesting (maturing assets), but that’s all dependent on how the economy evolves between now and then,” Harker told reporters in Philadelphia.

The comments added another voice to at least four other U.S. central bankers, including New York Fed President William Dudley, who on Friday flagged 2017 as a possible timeframe to start trimming the $4.5 trillion portfolio of mortgage and Treasury bonds.

“We have to balance this off the path of the fed funds rate. As we cease reinvestment it will remove some accommodation. These two things are related,” Harker added, reinforcing the similarly growing view that the Fed could temporarily pause interest rate hikes when it starts the portfolio process.

The Fed amassed the record amount of assets to spur investment, hiring and economic growth following the 2007-09 recession. Only in recent weeks have officials spoke out about when they expect to stop topping up the portfolio when assets mature, as the Fed does now.

Prior to that, economists polled by Reuters and by the Fed itself generally expected the process to start some time next year, a move anticipated to raise market yields as the world’s largest holder of U.S. government debt edges back from the market.

Harker said it was unclear how much the Fed should shrink the portfolio. But he supports a “Treasury-heavy” portfolio in the future, adding that the Fed may not dump all of its nearly $2 trillion in mortgage-backed securities.

Reporting by Jonathan Spicer; Editing by Meredith Mazzilli