Fed’s George says balance sheet should be trimmed this year

on May9

Esther George, president and chief executive officer of the Kansas City Federal Reserve Bank.

Christopher Dilts | Bloomberg | Getty Images

Esther George, president and chief executive officer of the Kansas City Federal Reserve Bank.

Kansas City Federal Reserve President Esther George on Tuesday said she supported starting to wind down the Fed’s massive trove of bonds this year.

Speaking at an economics conference in Santa Barbara, California, George said the central bank’s Federal Open Market Committee should move to stop reinvesting the maturing principal payments of its longer-term Treasuries and mortgage-backed securities.

“The FOMC also must begin to adjust the size and composition of its securities holdings,” George said in prepared remarks, warning that the U.S. economy was at risk of overheating.

George does not have a vote on monetary policy this year but participates in discussions. She will next be a voting member of the FOMC in 2019.

Only five of 15 primary dealers – the big Wall Street banks that do business directly with the Fed – expected the central bank to start paring investments by year end, according to a Reuters poll in early April. Most primary dealers expect the Fed will lay out its plans for winding down the balance sheet this year.

Still, a growing chorus of Fed officials have signaled the time is nearing for them to start trimming the central bank’s $4.5 trillion balance sheet that accumulated during years of bond-buying aimed at stimulating the economy.

A big balance sheet at the Fed pushes down on long-term rates, and trimming it would allow those rates to rise slightly, cooling job growth and inflation.

George said once the Fed enacts a plan to reduce its bond holdings, it should leave the policy on “autopilot” and not reconsider it “at each subsequent FOMC meeting.” Re-opening the discussion on winding down the balance sheet too often could “potentially complicate monetary policy and provide few benefits to the real economy,” she said.

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