It will take the U.S. central bank at least six years to reduce its bloated balance sheet back to more a normal size, San Francisco Federal Reserve Bank President John Williams said, as officials take a gradual approach to withdrawing crisis-level stimulus.
“Our plan is to shrink the balance sheet ‘organically,’ if you will, through the maturation of the assets,” Williams said in the text of remarks Friday in Santa Barbara, California.
“It’s likely going to take at least six years to get the balance sheet back to normal, which is in keeping with the overall approach to removing accommodation gradually.”
The Federal Reserve is slowly weaning the economy off of ultra-easy monetary policy that saw it hold interest rates near zero for seven years and balloon the balance sheet to around $4.5 trillion through three rounds of buying mainly Treasuries and mortgage-backed securities.
Officials took a major step in December, raising interest rates for the first time since 2006, and said they’ll wait until the process of policy normalization is well under way before beginning to allow excess balance-sheet holdings to roll off.
“The Fed has started the process of raising interest rates, but the path to normal will be gradual,” Williams said Friday.
Economic ‘Steam’
He said the economy “still has a good head of steam,” that he expected would help keep the unemployment rate on track to decline to around 4.5 percent by mid-year. He didn’t discuss the December employment report in his prepared remarks, which was released by the Labor Department earlier on Friday and showed the jobless rate remained at 5 percent.
“Looking forward, I see a labor market that’s growing ever stronger and will reach maximum employment on a broad set of measures very soon,” he said.
Even so, Williams argued that the economy still needed support from Fed policy to help it overcome headwinds from slower growth abroad and the fallout from a stronger dollar, which was why officials expect a gradual pace of rate hikes.