| NEW YORK
NEW YORK The Federal Reserve's $4.5-trillion bond holdings may not shrink as much as previously assumed, and could "normalize" around $2.8 trillion by the end of 2021, the New York Fed said on Thursday in estimated projections that could help answer a question looming over financial markets.
The projections, based on published Fed and Wall Street forecasts of interest rates from December, compare to last year's estimate that the portfolio would ultimately drop to $2.2 trillion by mid-2022 as the U.S. central bank continues to tighten policy and gradually shed bonds.
The Fed amassed the record holdings of Treasury and mortgage securities after three rounds of "quantitative easing" meant to boost U.S. investment and hiring in the wake of the financial crisis and recession.
The annual projections do not take into account minutes from a mid-March meeting, which showed most Fed policymakers expected to start shedding bonds later this year, earlier than most economists had expected, by letting the assets mature.
A separate New York Fed survey done before the meeting but published on Thursday showed most primary-dealer banks expected the Fed to wait until the first half of next year to begin the process. The dealers generally expected the portfolio to have declined to between $3.5 trillion and $4 trillion by the end of 2019.
The central bank, the world's largest holder of U.S. government debt, has been topping up maturing bonds and has not said how much it will ultimately shrink the portfolio, which stood at about $900 billion before the crisis. When it will begin to back away and how far it goes is expected to reverberate through financial markets.
The New York Fed, which manages the portfolio and conducts U.S. monetary policy, estimated that by the fourth quarter of 2021 the portfolio would contain "a slightly higher concentration of Treasury securities than in agency (mortgage-backed) securities." A year ago, it said the portfolio would be "split roughly evenly."
The Fed turns over profits from the bonds to the U.S. Treasury and remitted $91 billion last year, down slightly from 2015. Those remittances are beginning to decline now that the central bank is lifting rates and, to help it do so smoothly, as it pays private banks an increasing rate of interest on their excess reserves.
Under the projections, the remittances to Treasury drop to a trough of $55 billion by 2020. A year ago, the New York Fed projected the trough would be roughly $50 billion in 2019.
Faster rate hikes than currently planned would cut reinvestments more rapidly, and vice versa. The New York Fed stressed the assumptions would be influenced by several things including future policy decisions and economic and market conditions.
(Reporting by Jonathan Spicer; Editing by Chizu Nomiyama)