September 22, 2017 / 2:25 PM / 9 months ago

KC Fed's George: 'Gratified' balance sheet plan met with muted market reaction

OKLAHOMA CITY (Reuters) - Kansas City Fed President Esther George said on Friday the muted market reaction to the launch of the Fed’s balance sheet reduction plan earlier this week was a welcome development for the central bank.

“I was gratified,” that bond yields, the dollar and stock markets moved only slightly after the Fed announced on Wednesday that its $4.2 trillion in securities holdings would start to decline next month.

The plan “was very well telegraphed,” and the absence of any sharp response among investors is what the Fed had hoped, George said.

George is the first Fed official to speak publicly since the central bank launched the balance sheet reduction plan at its latest policy meeting this week. The strategy will allow its holdings of Treasury bonds and mortgage-backed securities to fall up to $10 billion per month at first and as much as $50 billion a month next year. The plan was designed to allow a pace of reduction that would be so gradual and steady that there would be little short-term impact on interest rates.

“My hope is this continues to operate smoothly and as many have noted in the background,” said George, who opposed the third and final round of asset purchases used to fight the crisis until 2014. With the balance sheet now declining, George said she hoped the quantitative easing strategy “will be kept in a box” and not be used again.

George also said she felt recent weak inflation was no reason for the Fed to back away from a continued gradual pace of rate increases.

“It is hard for me to see...any of that is related to weak economic activity,” at a time of low unemployment and still strong consumer confidence, said George, who has long argued that it was time to raise interest rates to more normal levels.

The expected gradual pace of rate increases is “appropriate...but we do have to keep moving,” she said.

Fed officials on Wednesday indicated they are prepared to raise rates again in December and three times next year.

Reporting by Howard Schneider; Editing by Chizu Nomiyama

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