By Mark Felsenthal and Emily Kaiser
ARLINGTON, Va., March 8 (Reuters) - The U.S. Federal Reserve will likely shrink its vast holdings of mortgage-related and other longer-term securities passively and gradually, a senior Fed official said on Monday.
'A decision to shrink the balance sheet more aggressively could be disruptive to market functioning,' Brian Sack, executive vice president at the New York Federal Reserve, told the National Association for Business Economics.
The assets will roll off fairly quickly with time, and an aggressive approach to diminishing the Fed's holdings would risk a spike in longer-term interest rates, Sack said.
The Fed is close to completing its scheduled purchases of around $1.7 trillion of mortgage-backed securities, agency debt and longer-term Treasuries it launched to boost the economy after cutting rates to near zero.
The Fed has said high unemployment and low inflation make it necessary to hold rates exceptionally low for an extended period.
But with evidence the economy has begun to recover from the worst financial crisis in generations, Fed officials have begun to explain how the U.S. central bank plans to unwind its extraordinary support for the economy.
Some Fed officials argue that the Fed should actively sell assets to help steer its tightening of financial conditions.
Sack said that while reversing the Fed's low rates and massive infusions of cash into the economy will involve steps it has never taken before, he is confident the central bank has minimized risks.
'We have worked hard to ensure we have all the tools needed to exit,' he said. 'If we communicate effectively, the markets should be clearly informed and well-prepared ahead of any exit.'
As the Fed proceeds, it will lay out the path of both interest rates and of asset holdings, Sack said.
However, what the Fed says about the likely direction of its policy after its meetings is likely to be a more important guide to markets about the path of short-term interest rates than any decisions about draining reserves from the system, he said.
'It will be difficult for market participants to make precise inferences about the timing of increases in the target interest rate from the patterns of reserve draining alone,' Sack said.
(Editing by Dan Grebler and Leslie Adler) Keywords: USA FED/SACK (mark.felsenthal@thomsonreuters.com; Tel: +1 202 898 8329; Reuters Messaging: mark.felsenthal.reuters.com@reuters.net) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.
ARLINGTON, Va., March 8 (Reuters) - The U.S. Federal Reserve will likely shrink its vast holdings of mortgage-related and other longer-term securities passively and gradually, a senior Fed official said on Monday.
'A decision to shrink the balance sheet more aggressively could be disruptive to market functioning,' Brian Sack, executive vice president at the New York Federal Reserve, told the National Association for Business Economics.
The assets will roll off fairly quickly with time, and an aggressive approach to diminishing the Fed's holdings would risk a spike in longer-term interest rates, Sack said.
The Fed is close to completing its scheduled purchases of around $1.7 trillion of mortgage-backed securities, agency debt and longer-term Treasuries it launched to boost the economy after cutting rates to near zero.
The Fed has said high unemployment and low inflation make it necessary to hold rates exceptionally low for an extended period.
But with evidence the economy has begun to recover from the worst financial crisis in generations, Fed officials have begun to explain how the U.S. central bank plans to unwind its extraordinary support for the economy.
Some Fed officials argue that the Fed should actively sell assets to help steer its tightening of financial conditions.
Sack said that while reversing the Fed's low rates and massive infusions of cash into the economy will involve steps it has never taken before, he is confident the central bank has minimized risks.
'We have worked hard to ensure we have all the tools needed to exit,' he said. 'If we communicate effectively, the markets should be clearly informed and well-prepared ahead of any exit.'
As the Fed proceeds, it will lay out the path of both interest rates and of asset holdings, Sack said.
However, what the Fed says about the likely direction of its policy after its meetings is likely to be a more important guide to markets about the path of short-term interest rates than any decisions about draining reserves from the system, he said.
'It will be difficult for market participants to make precise inferences about the timing of increases in the target interest rate from the patterns of reserve draining alone,' Sack said.
(Editing by Dan Grebler and Leslie Adler) Keywords: USA FED/SACK (mark.felsenthal@thomsonreuters.com; Tel: +1 202 898 8329; Reuters Messaging: mark.felsenthal.reuters.com@reuters.net) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.