Tuesday, January 10, 2017

Boston Fed Head: "the Fed is already 'running the economy hot.'"

From Reuters via CNBC:

INTERVIEW-Rosengren urges more rate hikes, slimmer balance sheet
he Federal Reserve should consider trimming its $4.5 trillion balance sheet to help raise interest rates more quickly and reduce the negative impact on the economy of a stronger dollar, Eric Rosengren, president of the Boston Fed, said on Monday.

"There are some benefits to actually tightening not just on short rates but also possibly on long rates," Rosengren told Reuters in an interview, following a speech at the Connecticut Business and Industry Association in which he called for faster interest-rate hikes.

Last month Rosengren was among Fed policymakers who voted unanimously to raise by a quarter of a percentage point the U.S. central bank's target range for overnight borrowing between banks, to 0.5 percent to 0.75 percent.

After the decision, Fed Chair Janet Yellen reiterated the central bank's plan to keep its balance sheet unchanged until rates are high enough to give the Fed a more comfortable cushion to cut rates in case of an adverse shock.

The balance sheet, acquired through years of Fed bond purchases, part of extraordinary measures taken in response to the financial crisis and known as quantitative easing, pushes down on long-run borrowing costs and is aimed at encouraging more business investment and hiring.

Currently, the Fed uses the proceeds of maturing mortgage-backed securities and government bonds in its portfolio to buy more bonds to keep the balance sheet from shrinking. Yellen has said that once rate hikes are well under way, the Fed will cease those reinvestments.

Rosengren's comments suggest he may be advocating for trimming the balance sheet sooner than that.

"We should be considering it," said Rosengren, who is not a voter on rate decisions this year, but does participate in policy debates. "One reason might be that you might get less of an exchange rate effect from long-term rates than short-term rates and so that would argue for some of the tightening coming by reducing the balance sheet and not having it all be on short-term rates."...MORE