Central Bank Should Weigh Asset Sales to Curb Inflation, Says Fed Official

A top Federal Reserve official said the central bank should consider selling bonds from its $9 trillion asset portfolio to address high inflation and guard against harmful effects that can result from raising short-term rates above long-term rates.

In an interview Friday, Kansas City Fed President Esther George said one drawback of expanding the Fed’s asset portfolio to stimulate the economy in downturns, a process sometimes called quantitative easing, is that officials may now face more complications in removing stimulus by using two policy tools —interest rates and the bond portfolio.

“There was an explicit recognition that introducing quantitative easing was going to complicate monetary policy,” she said. “So I don’t think we can avoid the complexity that has come with a decision to deploy this tool. At the same time, she added, “what you don’t want to do is oversteer here.”

Fed officials agreed last month on a statement of principles for managing a significant reduction of the central bank’s asset holdings, which have more than doubled over the past two years as part of its pandemic stimulus program.

The principles said the central bank would rely on the Fed’s short-term benchmark rate as the primary way it adjusts its policy setting. The statement also called for primarily reducing the bond portfolio passively by allowing securities to mature without replacing them.

In recent speeches, Ms. George has signaled concern that maintaining a large asset portfolio could hold down long-term rates in a way that distorts lending decisions, particularly as the Fed steadily raises short-term rates.

“My guess is with a $9 trillion balance sheet pushing down on long-term rates, we’re going to have to face some considerations about how much downward pressure” is being placed on various maturities of Treasury securities, she said. Actively selling mortgage securities could provide one way to reduce such stimulus, but it is something the Fed never did during an earlier effort, between 2017 and 2019, to shrink its holdings.

Given the current state of the economy, with high inflation and low unemployment, the Fed doesn’t have the luxury it had several years ago of spending more time to design its strategy, Ms. George said. She added, “That doesn’t mean in March we’re going to have to say, ‘Let’s start the sales.’ ”

Ms. George said she hadn’t yet formed a view over how much the Fed would need to raise interest rates this year. With inflation up 7.5% in January and the Fed’s benchmark rate near zero, “our policy is out of sync,” she said.

The Federal Reserve has signaled it plans to raise interest rates in 2022 in response to stubbornly high inflation. WSJ’s JJ McCorvey explains what higher rates could mean for your finances. Photo illustration: Todd Johnson

Fed officials have recently said they are focused on returning rates to a more neutral stance that neither spurs nor slows economic growth, and most officials estimate that a neutral rate is around 2% to 3% when inflation is near the Fed’s 2% target.

“What we have to do is be systematic,” Ms. George said. “It is always preferable to go gradual…Given where we are, the uncertainties around the pandemic effects and other things, I’d be hard-pressed to say we have got to get to neutral really fast.”

She said it was too soon to say, for example, whether the Fed should raise interest rates at its March 15-16 meeting by a half percentage point instead of a traditional quarter percentage point. After last Thursday’s report of strong inflation in January, investors in interest-rate futures markets began to anticipate the larger rate increase for March.

“It certainly paves the groundwork for discussion,” said Ms. George.

She said she was more focused on coming up with a methodical overall approach for removing stimulus. “If we get to March and the data says we should be talking about that [a half-point rate increase]I’m sure that will be in play, but I’m not sure that is the answer, per se, to how we get there,” Ms. George said.

Some analysts after last Thursday’s inflation report speculated about whether the Fed might raise interest rates in between scheduled meetings. Ms. George said such moves are reserved for emergencies and said she doesn’t see the current situation as an emergency. “I don’t know that I’d call the markets reacting to data an emergency here, because frankly, in my own forecast of looking where inflation was moving, the print was not a surprise,” she said.

Write to Nick Timiraos at

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