In unwinding its balance sheet, Fed should start slow, but start soon

THE US Federal Reserve should not rush into the unwinding of its balance sheet, but neither should it wait too long to start doing something.

To guard against the risk that a premature normalisation of policy might snuff out a fragile recovery in the United States, the Fed should take a slow and measured approach and consider preserving its options to adjust the pace of winding down as is appropriate to the data. But the Fed should also be mindful of the market distortions caused by its extraordinary policy, and start to lay the groundwork for avoiding the next bubble.

The Fed's policymaking body, the Federal Open Market Committee, is meeting this week. The market is not expecting the central bank to raise interest rates at this time, but consensus is more elusive when it comes to the question of the Fed's balance sheet.