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NEW YORK (Reuters) - The Federal Reserve might in the future avoid raising interest rates at the same time that it begins the process of shrinking its $4.5 trillion bond portfolio, prompting only a "little pause" in the central bank's rate hike plans, an influential Fed official said on Friday.
"Presumably, at the time that you make the decision on the balance sheet you might want to forego the decision on short-term rates just to make sure that the balance sheet doesn't turn out to be a bigger decision than you thought you were making," New York Fed President William Dudley said at a luncheon.
The comments shed more light on the Fed's developing plan for when to stop topping up bonds that expire as it does now, how it plans to execute it and how far it will ultimately go in shrinking its balance sheet.
The Fed has hiked rates twice in the last three months and aims, according to policymakers' forecasts, to tighten policy three times in each of the next few years. Minutes from the Fed's mid-March meeting showed most policymakers expected to start shedding bonds later this year, a sentiment Dudley endorsed again on Friday, adding it could also happen in 2018.
Of the $4.5 trillion in total assets, some $2 trillion offset excess bank reserves. Dudley said that while the Fed does not know how many excess reserves are need to conduct monetary policy, "most people who looked at it suggest that maybe you have excess reserves somewhere in the area of half a trillion to a trillion dollars."
He added: "We'll get to a much smaller balance sheet, but not as small as prior to the crisis," or around $900 billion.
Reporting by Jonathan Spicer; Editing by Meredith Mazzilli