Fed may start reducing bond holdings slowly

Washington

IF you thought the Federal Reserve's interest-rate increases have been gradual, wait until you see what it has planned for its US$4.5 trillion balance sheet.

The US central bank looks likely to begin reducing its bond holdings at a glacial pace given how uncertain officials are about the impact on financial markets, monetary policy and the economy.

The aim, according to New York Fed president William Dudley, is to ensure that the drawdown is "a very modest, minor event".

"We want this very much to run in the background," he said at the Bombay Stock Exchange in Mumbai on May 11. So "we're going to do this in a very careful way that's very much well-communicated to markets".

That doesn't mean there aren't risks to a move that officials say could start later this year. Despite the central bank's best intentions, it may still end up disrupting markets, especially for mortgage-backed bonds. It holds more than a quarter of US government-backed mortgage-r…