Yellen gives passing grade to US balance sheet drawdown

[WASHINGTON] Efforts to unwind the US Federal Reserve's multitrillion-dollar investment holdings are going well so far, outgoing central bank chief Janet Yellen said Tuesday.

Nearly a decade after the global financial crisis, the Fed last month marked the beginning of the end of its bond-buying economic stimulus program, allowing its US$4.5 trillion balance sheet of assets to taper down as the economy continues to recover.

In public remarks at New York University, Ms Yellen said Tuesday that policymakers had begun talking a year in advance about how to ensure the public and markets understood the Fed's actions.

"Knock on wood," she said, "so far, so good."

Markets have taken the balance-sheet unwinding in stride, with Wall Street continuing to rally since procedures began despite widespread expectations for the central bank to increase interest rates next month for the third time this year.

Rather than sell its assets, the Fed is simply allowing debts to mature and fall off its balance sheet, a "normalisation" process designed in part to avoid roiling markets.

In the final three months of this year, the Fed is due to reduce its investment holdings by US$10 billion per month, increasing the monthly rate by US$10 billion every quarter until the drawdown rate hits US$50 billion per month in October.

Ms Yellen also reiterated her defence of Dodd-Frank Wall Street reforms, noting that these had raised banks' capital strength and liquidity and improved their risk management through stress-testing.

"And we've required them to engage in resolution planning so that a firm that encounters trouble, rather than being bailed out again, actually could be resolved," Ms Yellen said.

"It's important that those things stay in place so we have a sound and resilient financial system."

President Donald Trump this month broke with tradition by denying Ms Yellen a second term as central bank chief, appointing Fed Governor Jerome Powell to replace her.

Observers said Ms Yellen hurt her chances at reappointment with a vocal defence over the summer of Wall Street reform legislation put in place after the financial crisis - something Mr Trump has vowed to roll back.

Ms Yellen announced Monday she would leave the Federal Reserve Board altogether in February after her four-year term as chair expires. Her term as a board member was due to run until 2024.

AFP