Yellen: Fed may cut assets over a decade

The US Federal Reserve is in no rush to decide the appropriate size of its balance sheet, but if it ultimately shrinks it to a pre-crisis size, the process could take the better part of a decade, Fed chair Janet Yellen said yesterday.

Ms Yellen, in testimony to a Senate panel, said no decision had yet been made on the central bank’s portfolio of assets, which has swollen to $4.5 trillion (€3.25trn) from about $800bn in 2007.

Three rounds of asset purchases meant to stimulate the economy in the wake of the 2007-2009 financial crisis have boosted the balance sheet to this record level. Unsatisfied with the US recovery, the Fed is still adding $45bn in bonds each month, though the purchases should end later this year.

Ms Yellen said the portfolio should start to shrink once the Fed decides to raise near-zero interest rates.

“We’ve not decided, and we’ll probably wait until we’re in the process of normalising policy to decide just what our long-run balance sheet will be,” she said.

While the central bank could sell the mortgage-based bonds it has accumulated, in the past it has telegraphed that it would more likely simply stop re-investing funds from expired assets and then, over years, let the assets run off the balance sheet naturally.

“If we do that and nothing more, it would probably take somewhere in the neighbourhood of five to eight years to get it back to pre-crisis levels,” Ms Yellen said of halting reinvestments.

The massive Fed portfolio has sparked worries that, once it starts to raise rates, inflation will shoot up.

- Reuters