(Reuters) - Kansas City Federal Reserve Bank President Esther George, a longtime critic of the U.S. central bank's bond buying program, said Wednesday she wants to get started on trimming the Fed's $4.5 trillion balance sheet in the "near future."
Fed policymakers last month agreed on a basic plan for reducing the balance sheet, built up over years of bond purchases in an effort to reduce long-term borrowing costs and spur investment after the 2007-2009 financial crisis.
They remain split on exactly when to start those reductions. Some like are George pushing for doing so soon in order to limit the possibility of an asset bubble or other distortion that could ultimately spark another crisis or recession.
"Holding long-term rates below the level that they might otherwise move to naturally, amidst improving economic fundamentals, risks creating financial imbalances," George said in remarks prepared for delivery at a Kansas City Fed economic forum in Denver, Colo.
While the Fed has raised short-term interest rates two times this year and expects to do so again before the end of the year, longer-term rates have not risen much in response. A narrow gap between short-term and long-term borrowing costs can distort investment decisions, George said; shrinking the balance sheet could allow long-term rates to rise gradually.
Current asset valuations and low implied volatility in stock and bond markets may be signaling investor complacency, she said.
"The failure of longer-term rates to move up with short-term rates during this normalization cycle illustrates the risk for a disruptive repricing of assets as markets adjust to a more normal policy stance," George warned, adding that such potential for disruption underscores the need to make sure that the largest U.S. banks are well-capitalized and able to withstand a financial shock.
Reporting by Ann Saphir; Editing by Chizu Nomiyama