FRANKFURT It would make sense if the U.S. economy continues to grow for the Federal Reserve to begin trimming its $4.5 trillion balance sheet toward the end of this year, unwinding extraordinary stimulus deployed during the crisis, a Fed policymaker said on Thursday.
John Williams, president of the San Francisco Federal Reserve Bank, said this process would take several years and run in parallel, albeit for longer, to increases in the Fed's interest rates.
"It would make sense to take the next step in terms of starting the normalization process of our balance sheet," Williams told reporters on the sidelines of a conference in Frankfurt.
"My own view would be towards the end of this year would be a good time to take that next step, assuming the economy progresses."
The Fed bought Treasury and mortgage-backed bonds on an unprecedented scale in the wake of the financial crisis to help keep interest rates low to spur hiring and growth.
It is currently reinvesting the money it gets from maturing bonds, thereby keeping the size of its balance sheet unchanged.
But the U.S. economy is now growing at a healthy clip and Fed rate setters discussed whether to phase out or halt reinvestments all at once at their March 14-15 meeting, at which they also voted to raise interest rates.
Williams, who is close to Fed Chair Janet Yellen, said any such move would be communicated in advance, may start gradually and may take around five years.
He added the Fed's balance sheet needed to come down significantly from its current size but no decision had been made on its desired level.
"We can end at $2 trillion plus or minus and the process of ending reinvestments will take several years," he said.
"The number of years we are thinking about… is something like five years."
Williams, who regains a vote on the Fed's policy committee next year under a rotation, repeated his expectation that the Fed will cut rates twice more this year but added there was a possibility of a third rate hike if inflation data held up.
This would take the total number of rate hikes for this year to four.
(Editing by Jeremy Gaunt.)