Start Of Fed Balance Sheet Drawdown Going Well, Fed's Bostic Says

By Michael S. Derby Features Dow Jones Newswires

Federal Reserve Bank of Atlanta President Raphael Bostic said Wednesday the start to central bank balance sheet reduction is going well, in part because the economy is in a good place to deal with the shift in monetary policy.

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Mr. Bostic, whose comments came from the text of a speech prepared for delivery before a conference in Hong Kong, was addressing the Fed's effort to reduce the size of its $4.5 trillion balance sheet. Announced in September, the Fed, starting this month, is allowing progressively larger amounts of Treasury and mortgage bonds to mature from its holdings and not be replaced.

Fed officials are trying to bring their holdings back toward pre-crisis levels, although they haven't decided yet how far the balance sheet needs to shrink. Their holdings grew as the Fed bought long-dated bonds during the financial crisis to stimulate the economy. Officials think they got a lot for the effort, but have said somewhat paradoxically that they expect the wind down process to be smooth and uneventful.

"The exit will be less dramatic than the entry," Mr. Bostic said.

"While much is uncertain about this unprecedented policy unwinding, there are good reasons to think that the effects of a gradual and predictable ramping down of the balance sheet will be smaller than the effects measured as the balance sheet expanded," Mr. Bostic said.

He reckoned that bond purchases in times of economic and market distress are likely more "powerful" than reversing the process when times are good. Market shifts and other factors also mean some of the impact of the balance sheet drawdown have already priced into the market the Fed's policy change, he added.

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Mr. Bostic noted that so far, the balance sheet plans appear to have effectively no market impact. "Although I don't expect financial market conditions to be significantly affected in the coming months by balance-sheet reductions themselves, I, along with my colleagues, will obviously be monitoring financial markets for any change in financial conditions that could affect the macroeconomy," he said.

Mr. Bostic also offered an upbeat assessment of the economy in his speech.

The U.S. is on "solid footing, and there are several signs that this performance is likely to continue" with growth around 2%. Hurricanes that struck the U.S. are likely to distort data but he doesn't believe those events will derail the expansion.

Mr. Bostic said job creation remains "strong." He added, "low wage growth may suggest that some residual slack may yet remain in labor markets. But I would judge the shortfall to be relatively small, and getting smaller."

On the inflation front, Mr. Bostic joined with many of his colleagues and said price rise weakness is likely to be temporary.

"With a relatively strong and still-improving labor market and stable inflation expectations, I am looking for inflation to drift up to 2% over the next year or so," he said.

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

(END) Dow Jones Newswires

October 11, 2017 21:25 ET (01:25 GMT)