Fed should switch other assets for Treasuries: Plosser

NEW YORK (Reuters) - An agreement with the U.S. Treasury to swap Treasury bonds for non-government debt on the Federal Reserve's balance sheet could help the central bank unwind its extraordinary credit-easing policies, a top Fed official said on Friday.

The move would also help draw a clearer distinction between monetary and fiscal policy to ensure the Fed's independence does not come under attack, Philadelphia Federal Reserve Bank President Charles Plosser said in remarks prepared for delivery to a forum on monetary policy.

"The current crisis and the Fed's interventions have dramatically altered the composition of the assets on our balance sheet and created confusion in the minds of many as to the respective roles of the central bank and the fiscal authority," Plosser said.

The U.S. central bank's balance sheet has more than doubled to around $2 trillion as it pumped hundreds of billions of dollars into key credit markets. It has bought assets that it would not usually hold on its balance sheet, including agency debt and agency mortgage-backed securities.

An agreement with the Treasury to switch U.S. government bonds for these less-liquid non-traditional assets on the Fed's balance sheet would help the central bank focus on conducting traditional monetary policy.

"With Treasuries back on the balance sheet, the Fed will be able to drain reserves in a timely fashion with minimal concerns about disrupting particular credit allocations or the pressures from special interests," said Plosser, who is not a voting member on the Fed's policy-setting committee this year.

He said such an agreement would transfer funding of the credit programs to the Treasury, "thus ensuring that credit policies that place taxpayer funds at risks are under oversight of the fiscal authority.

"Second, it would return control of the Fed's balance sheet to the Fed, so that we can continue to conduct independent monetary policy," he said.

Plosser said it is important for the Fed to articulate a clear exit strategy from its credit policies and anticipate that political pressures could make it more difficult to shrink its balance sheet quickly enough when the time comes.