PHILADELPHIA (Reuters) - The U.S. Federal Reserve could adjust the pace at which it trims its $4.5 trillion in bond holdings depending on how financial markets react, a Fed policymaker said on Friday in comments that could raise questions over the central bank’s emerging plan to shelve a crisis-era policy.
“We can slow the pace of that or accelerate the pace of that depending on how the market reacts,” Philadelphia Fed President Patrick Harker, a voting member of the Fed’s policy committee this year, told reporters.
“We just have to be cautious and very clear in our communication,” he added. If “we are willing to adjust if things change, we can minimize disruption to the markets, and that’s exactly” the plan.
The Fed amassed the Treasury and mortgage bonds in the wake of the 2007-2009 recession in order to spur investment, hiring and economic growth. Policymakers aim to begin trimming the portfolio as soon as later this year, a move that could lead to a spike in market-based yields.
A few of Harker’s colleagues have said they prefer to shed bonds in a way that it is done in the background, or on “autopilot,” to avoid the confusion of investors attempting to guess whether the Fed will make changes to the pace at each policy meeting.
Caps on the pace of the monthly bond run-off “could be fixed or they could be variable,” Harker said, adding the caps could be based on a dollar value and increased over time.
“Maybe you start off with low caps and over time, as the market adjusts, we can move the cap,” he said, adding “that could essentially be on auto-pilot” if the pace if spelled out beforehand.
“It’s still a debatable point,” Harker said of the ultimate plan for shedding bonds and for raising interest rates. He backs two more hikes this year, but said on Friday an acceleration in inflation could convince him to back three rises.
Reporting by Jonathan Spicer; Editing by Chizu Nomiyama