The Federal Reserve should sell its U.S. mortgage-backed securities holdings sooner rather than later as the economic recovery gathers steam in order to extricate itself from fiscal policy, a senior central bank official said on Wednesday.
At the height of the 2008-09 financial crisis, the Fed put in place a raft of emergency programs, including one to buy $1.25 trillion worth of securities backed by mortgages guaranteed by Fannie Mae and Freddie Mac. In the process, its balance sheet more than doubled to over $2 trillion.
As the economic recovery gains strength and monetary policy begins to normalize, I would favor our beginning to sell some of the agency mortgage-backed securities from our portfolio, rather than relying only on redemptions of these assets, Philadelphia Federal Reserve Bank President Charles Plosser told the World Affairs Council of Philadelphia.
It will take some time for the Fed's portfolio to return to its pre-crisis composition, but we should begin taking steps in that direction sooner rather than later, Plosser said.
Minutes of the Fed's January policy-setting meeting show he is not alone in that view. Several policymakers want to begin selling securities relatively soon, the minutes showed.
Plosser, known as a hawk on inflation, is not a voting member on the Fed's policy-setting committee this year. He will rotate into a voting seat next year.
Answering reporters' questions after his speech, Plosser said that the timing and speed of asset sales will depend on economic conditions, but that the Fed's balance sheet ultimately has to shrink.
Obviously, the faster we do it the better, in some sense, but we have no desire to disrupt the mortgage market or tank the economy in the process, so it will have to be done delicately, he said. Sales could be done at a modest pace at first to test markets' ability to absorb the assets, he added.
Asked about the likely order of the Fed's exit from its emergency policies, Plosser said no decision had been made yet.
But, he added: I'm not opposed, and I'd even favor, shrinking the balance sheet before we raise rates. Ultimately, the balance sheet has got to get down.
RATES NEAR ZERO
In addition to its emergency lending during the crisis, the Fed cut benchmark interest rates to near zero in December 2008 and has pledged to keep them there for an extended period.
One policymaker, Kansas City Fed President Thomas Hoenig dissented against the Fed's decision to continue to promise to hold interest rates ultra-low for an extended period.
Plosser told reporters he was sympathetic to Hoenig's view that the Fed should change that language. It does confine us in some ways. It creates expectations in the markets which is a problem, he said.
Plosser has been vocal in his unease about the Fed's extraordinary policies, saying lending to specific sectors of the economy blurred the line between fiscal and monetary policy. That, along with bailouts of individual firms, has opened the central bank up to attacks on its independence, he said.
By making these unprecedented lending decisions -- and at times being less transparent than we could have been -- the Fed has opened itself up to criticism from various sources and has encouraged the idea that monetary policy decisions may be influenced by political or other special interests, Plosser said in his speech.
The Philly Fed president said he believes the Fed can withdraw its stimulus without generating a serious risk of inflation in the intermediate to long term, but noted that will require some careful and difficult policy choices.
Politicizing that decision-making process will not deliver the desired outcomes and runs counter to responsible and sound central bank practice, he said.