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The U.S. Federal Reserve Chair Janet Yellen said on Thursday that the Fed needs more time to decide the appropriate size of its balance sheet and expects the portfolio of assets to gradually decline over time after it finally begins to tighten policy.
"We've not decided and will probably wait until we're in the process of normalizing policy to decide just what our long-run balance sheet will be, but clearly it will be substantially lower than it is now, and it will take a period of a number of years," she told lawmakers when she testified before the Senate Budget Committee.
"This could happen, simply by ending our reinvestment policy at some point. If we do that and nothing more, it would probably take somewhere in the neighborhood of five to eight years to get it back to pre-crisis levels," she added.
After three rounds of asset purchases meant to stimulate the U. S. economy, the Fed's balance sheet has swollen to more than 4 billion dollars from about 800 billion dollars in 2007. The Fed is reinvesting principal payment from maturing mortgage securities to keep its holding steady.
In her testimony to a House panel on Wednesday, Yellen said the central bank had indicated that it does not intend to sell mortgage-backed securities from its portfolio, "except perhaps when the holdings are very small."
She suggested that when the Fed stops reinvesting funds from expired assets, its holdings of mortgage-backed securities would begin to decline over time as principal matures.
The Fed trimmed its monthly purchases of Treasury and mortgage- backed securities by a total of 10 billion dollars in each of the past four policy meetings, citing strengthening economy and continued improvement in the labor market.
The Fed policymakers have suggested they would continue to reduce the bond buying, which now totals 45 billion dollars a month, at a similar measured pace and end it by the end of the year, provided the economy develops generally in line with expectations.
