New York Fed Official Says Balance Sheet Reduction Going Well

By Michael S. Derby Features Dow Jones Newswires

The man responsible for the implementation of Federal Reserve decisions on monetary policy says the start to the trimming of the central bank's $4.5 trillion balance sheet is going well, and he expects that to continue.

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"I am confident that the [Federal Open Market Committee's] plan will reduce the size of the portfolio in a gradual and predictable, 'no surprises' manner," and that this plan will promote stable market conditions, Federal Reserve Bank of New York Markets Desk leader Simon Potter said in remarks prepared for delivery before the The European Money and Finance Forum.

Mr. Potter said allowing Treasurys and other securities owned by the Fed to mature, while not being replaced, should happen largely in the background, allowing traders and investors to set prices based on other factors. He suggested bond yields might rise over time as the Fed's holding shrink.

"We cannot and should not prevent Treasury and MBS prices from reacting to relevant economic and financial developments, or indeed from gradually moving over time in response to the progressive decline in the size of the Federal Reserve's holdings and consequent increase in the amount of securities held by the private sector," the official said.

Mr. Potter is responsible for executing Fed policy, not making it, even as he's an influential voice in how officials make their decisions. He spoke as the Fed has begun to allow its holdings to run off.

The Fed's balance sheet rose to $4.5 trillion from just above $800 billion in 2007 as part of a series of campaigns to buy longer-dated securities to help stimulate the economy.

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With four interest-rate rises under their belt, Fed officials met long-held expectations last month and announced that they'd start the process of allowing their holdings to move back toward normal levels. The amount of shrinkage is set to progressively expand over the year, although officials have yet to determine where they'd like the balance sheet to rest.

Fed officials have said they see the balance sheet reduction running on autopilot, and reckon a clear communications effort will make the process smooth.

"Early signs on this front are encouraging, with financial market volatility around recent balance sheet announcements quite modest relative to what we saw in 2013," when markets convulsed at the prospect of balance sheet reduction, Mr. Potter said. But he added that "it's much too early to declare success."

He said the Fed would actively monitor markets for trouble and be prepared to respond if needed. Mr. Potter explained the New York Fed "will maintain an appropriate set of capacities should the FOMC deem something different be required to promote the Federal Reserve's objectives."

Mr. Potter explained that in addition to the strong communications effort, the process may be running smoothly because the economy is doing well and the Fed is already well into the process of raising short-term rates.

Write to Michael S. Derby at michael.derby@wsj.com

(END) Dow Jones Newswires

October 11, 2017 14:14 ET (18:14 GMT)