Bloomberg: Fed Officials Signal Asset Sales to Play Bigger Role

26 Mar

Bloomberg reports on the Fed’s ‘asset sales’ strategy for ‘some sort of return to normal looking balance sheets’ – according to Fed officials.

“The programs are not monetary policy as conventionally defined, but rather fiscal policy or credit-allocation policy,” said Stanford University economist John Taylor, who also testified before the House committee yesterday. “They try to help some firms or sectors and not others.”

Fed Officials Signal Asset Sales to Play Bigger Role (Update1)

By Craig Torres and Scott Lanman

March 26 (Bloomberg) — Federal Reserve officials are moving toward a consensus that asset sales will play a more prominent role in their exit from the most expansive monetary policy in the central bank’s history.

Chairman Ben S. Bernanke told legislators yesterday that “restoring the size and composition” of the Fed’s record $2.32 trillion balance sheet to a “more normal configuration” is a long-term policy goal. St. Louis Fed President James Bullard said in an interview the central bank must start making plans now for future asset sales.

“There does seem to be agreement that you want to get back to a normal-looking balance sheet at some point in the future,” Bullard said. “We want to someday get back to a pre-crisis balance sheet — both the size of it and the fact that it would be an all-Treasuries balance sheet.”

The Fed is finishing up purchases of $1.43 trillion in housing-related debt as part of efforts to support the mortgage market and economy. While the central bank could temporarily withdraw excess cash from the banking system, without asset sales the balance sheet would remain large for years and keep the Fed as a stakeholder in housing markets. The policies have been criticized for favoring a specific industry.

“The programs are not monetary policy as conventionally defined, but rather fiscal policy or credit-allocation policy,” said Stanford University economist John Taylor, who also testified before the House committee yesterday. “They try to help some firms or sectors and not others.”

Fed Independence

Taylor has said the purchases jeopardize Fed independence by exposing it to pressure from lawmakers to use monetary policy to bail out favored industries. Fed officials are also concerned that the lack of budget discipline may result in calls for the Fed to begin buying government debt.

Marvin Goodfriend, a former Richmond Fed research director, said limiting the Fed’s holdings to Treasury securities would help fend off calls in Congress for audits of monetary policy, which could expose the central bank to political pressure.

“The Fed should return to Treasuries-only as soon as possible,” Goodfriend, a professor at Carnegie Mellon University’s Tepper School of Business in Pittsburgh, said today in a speech in New York. “Doing so would make it unnecessary for Congress to audit the Fed balance sheet or to scrutinize Fed monetary-policy actions beyond the regular oversight hearings.”

Bernanke and his colleagues have been outlining their strategy for tightening credit in time to prevent the recovery from stoking inflation.

‘Accommodative’ Policies

“The economy continues to require the support of accommodative monetary policies,” Bernanke said in testimony to the House Financial Services Committee. He said the central bank will be ready to tighten credit “at the appropriate time.”

Bernanke also told the panel that the “appropriate” size of the Fed’s balance sheet would be less than $1 trillion and stressed that an exit from housing assets is a policy goal. The Fed’s total assets stood at $878.5 billion at the start of 2007.

David Greenlaw, chief fixed-income economist at Morgan Stanley, said that some policy makers believe shrinking the balance sheet could help contain inflation expectations.

Fed officials may also be concerned that the central bank could end up losing money if short-term interest rates rose above the yield on the Fed’s portfolio of mortgage and Treasury bonds. In that case, it might have to ask the Treasury for cash to fund its operations.

“The political problems attached to that are monumental for the Fed” at a time of record U.S. budget deficits, Greenlaw said.

No Agreement

Bullard, 49, said there’s no agreement among policy makers on when to begin selling assets, and the economic recovery remains too fragile to start immediately.

“I don’t think you could do any kind of tightening policy right now,” said Bullard, who stressed he wasn’t commenting on the Fed chairman’s remarks or on the views of his Fed colleagues.

“You have to think about what kind of time horizon you want to get back to that normal balance sheet, and probably that has to involve some asset sales at some point,” said Bullard, who is a voting member of the rate-setting Federal Open Market Committee this year.

In his testimony, Bernanke said policy makers “would like to get back to an all-Treasury portfolio within a reasonable amount of time.”

“I anticipate that at some point we will in fact have a gradual sales process,” said the former Princeton University professor.

‘Monetary Restraint’

Bernanke, 56, avoided repeating a February statement that the Fed won’t sell any securities “at least until after policy tightening has gotten under way.” Instead, he said the tool is one way of “applying monetary restraint.”

The choice of tools the Fed could use to tighten policy — which include selling deposits to banks, tying up reserves and raising the rate the Fed pays on excess reserves held by banks – - will “depend on economic and financial developments.”

The Fed’s large-scale asset purchases were a signature of Bernanke’s “credit easing” policy. The Fed chairman told lawmakers that “a range of evidence” shows the purchases helped improve conditions in mortgage markets and other private credit markets.

Bullard said he would prefer to see some asset sales initially. “When the economy gets stronger, then maybe the natural thing to do would be to take back some of the quantitative easing,” he said in reference to asset sales. “Later on, you can decide whether you want to raise interest rates.”

To contact the reporters on this story: Craig Torres in Washington at; Scott Lanman in Washington at

Last Updated: March 26, 2010 11:01 EDT


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