San Francisco Federal Reserve Bank President John Williams on Saturday reiterated his view that the U.S. central bank should begin trimming its massive balance sheet later this year, in part so the Fed has more tools at the ready when the next recession hits. He was the fourth Fed official in two days to suggest the Fed may need to restart its controversial bond-buying program to help boost the economy in a future downturn.
The program, also used by central banks in Europe and Japan, was deeply unpopular among U.S. lawmakers especially in the majority Republican Party who said it encourages reckless government spending and does not work. Fed Chair Janet Yellen has been a big supporter of so-called quantitative easing. At least two of the potential candidates to succeed her when her terms ends early next year – former Fed governor Kevin Warsh and Stanford University economist John Taylor – have said they are skeptical of its effectiveness.
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Fed officials have signaled that the same economic strength that is allowing them to lift interest rates slowly will also likely allow them to start trimming the $4.5 trillion balance sheet, accumulated during years of bond-buying aimed at stimulating the U.S. economy, late this year or early next. A big balance sheet pushes down on long-term rates, and trimming it would allow those rates to rise slightly, cooling job growth and inflation. The goal is to trim the Fed’s holdings enough in order “to have a balance sheet that quite honestly in the future we could use if it was needed in a recession,” Williams said on Saturday.