Yellen told the lawmakers Tuesday that the FOMC will discuss that strategy “in the coming months” with the aim of providing investors with “some further guidance” about its intentions.
The central bank will want to telegraph its plans well advance of their implementation so as to avoid upsetting financial markets, said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York.
He expects policy makers to do that in the second half of this year. The process of halting reinvestments though won’t begin until the middle of next year, according to Feroli.
Yellen rejected recent suggestions by several Fed bank presidents that the central bank use its balance sheet as an active tool of monetary policy. Instead, the focus will remain on managing the fed funds rate in response to changes in the economy.
The Fed chair also said that the reduction in the Fed’s bond portfolio would occur in a “gradual and orderly way.”
Gradual Taper
That’s similar to the strategy the central bank employed when it tapered its asset purchases in 2014, reducing them in set amounts at each policy-making meeting.
More than $600 billion in Treasury securities in the Fed’s portfolio are scheduled to mature this year and next, according to calculations by Bloomberg.
Yellen’s four-year term as Fed chair expires on Feb. 3, 2018, and she repeated that she has no plans to leave the central bank before then.
McCarthy said the next Fed chair might well take a more aggressive approach to reducing the balance sheet, although Feroli said it might be difficult to change the Fed’s strategy once it has been put into place and digested by the markets.