October 11, 2017 / 5:16 PM / 2 years ago

New York Fed's market chief confident on balance sheet reduction plan

FILE PHOTO: The corner stone of the New York Federal Reserve Bank is seen surrounded by financial institutions in New York City, New York, U.S., March 25, 2015. REUTERS/Brendan McDermid/File Photo

NEW YORK (Reuters) - The Federal Reserve’s plan to pare down to its $4.5 trillion balance sheet from this month should go smoothly and not disrupt the Treasuries and mortgage-backed securities markets, the Federal Reserve’s top markets official said on Wednesday.

In September, the Federal Open Market Committee, the U.S. central bank’s policy-setting group, announced its long-awaited decision to scale back the holdings of government and mortgage debt it amassed during three rounds of quantitative easings to combat the last U.S. recession.

“I am confident that the FOMC plan will reduce the size of the portfolio in a gradual and predictable, ‘no surprises’ manner,” the New York Federal Reserve’s markets chief Simon Potter said in a prepared speech at the The European Money and Finance Forum.

The Fed has laid out a predictable and gradual program to normalize its balance sheet, which Potter expects would mitigate the risk of volatile or big price reactions in Treasuries and MBS.

On the other hand, he cautioned there is always the chance the shrinkage of the Fed’s bond holdings may not turn out as the Fed and investors expect, since there is no precedent for such a move.

“Now, confidence doesn’t mean certainty: there is always a risk that events could unfold differently from expectations,” Potter said.

He cited the “taper tantrum” in the bond market in 2013 after then Fed Chairman Ben Bernanke hinted at the Fed’s slowing its bond purchases as something some traders worry might happen again when the Fed shrinks its balance sheet.

“I believe the FOMC’s plan carefully takes into account the range of potential explanations for the taper tantrum, in particular through its emphasis on gradualism and predictability,” Potter said.

Reporting by Richard Leong; Editing by Chizu Nomiyama

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