LAS VEGAS (Reuters) - The U.S. economy will likely be strong enough for the Federal Reserve to trim its bond holdings in September, San Francisco Fed President John Williams said on Wednesday, in a sign the central bank was close to unwinding a controversial stimulus tool.
After pushing rates nearly to zero to fight the 2007-2009 financial crisis and recession, the Fed pumped over $3 trillion into the economy in a bond-buying spree to further reduce rates.
Now, most policymakers see the economy as close to full strength and the Fed said in a statement last month it would likely begin cutting its bond holdings relatively soon. The Fed’s rate setting committee, known as the FOMC, had previously said the process would begin before year’s end.
“The September FOMC meeting seems an appropriate time to do that,” Williams told reporters after giving a speech at an event hosted by The Economic Club of Las Vegas.
He added that he was comfortable with the view that the Fed could raise interest rates once more this year and around three times next year. The Fed has lifted short-term interest rates four times since December 2015.
Williams, who does not have a vote on monetary policy this year but participates in the Fed’s discussions, said Fed policymakers still were not sure how much they would trim the central bank’s $4.5 trillion balance sheet.
“It will be quite a bit lower than today,” he said during his speech.
The Fed’s bond-buying program, in which it bought Treasury bonds and mortgage-backed securities, has long been criticized by Republican lawmakers who considered it an overreach of the Fed’s powers to influence the economy.
Williams said the Fed needed to gradually remove monetary stimulus to keep the economy from overheating and that the Fed could adjust its plans on balance sheet reduction and rate increases if the economic outlook changed or if there were “issues” around the increase in the federal government’s limit on borrowing.
Williams said he expects the jobless rate, currently at 4.4 percent, to fall slightly and then hold just above 4 percent through 2018, with inflation rising to the Fed’s 2 percent target within one or two years.
Reporting by Jason Lange; editing by Diane Craft