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Fed official: Bond holdings would be reduced gradually

FRANKFURT, Germany (AP) — A top U.S. Federal Reserve official says the central bank would likely move in a measured way after it decides to reduce its large bond holdings.

San Francisco Federal Reserve President John Williams said there was a case to be made for moving slowly since reducing the bond holdings would lead to higher longer-term rates even as short-term rates are also being raised.

“As we do both of these, we’re going to see a tightening of financial conditions happening in two different ways,” Williams told reporters at a conference in Frankfurt, Germany.

He said that was “one of the arguments to go kind of slow” but added that “my own view is that U.S. economy is in a good place” and tightening would not be excessive “as long as we go gradually.”

The Fed piled up more than $4 trillion in financial assets on its balance sheet as a result of the global financial crisis and subsequent Great Recession. Buying bonds was a way of pushing newly printed money into the financial system and the economy, a step known as quantitative easing, or QE. The purchases drove down longer-term rates in an effort to help the economy recover. Now, however, the Fed is moving to withdraw such stimulus because the recovery is well advanced and unemployment has fallen to 4.7 percent.

The bond holdings can be gradually reduced by letting the bonds mature over a period of years. That tightens monetary policy by withdrawing the stimulus and could lead to higher long-term rates for corporate and government borrowing and mortgages. Minutes from the Fed’s latest meeting released Wednesday indicated Fed officials discussed starting that process earlier than many had expected.

Williams, a non-voting member of the open market committee who takes part in Fed discussions, said that he was expressing his own views but that “toward the end of this year would be a good time to take this step” and start reducing the holdings.

He added that short-term interest rate benchmarks would be raised to more normal levels before the bond holdings are reduced to a more normal level. He didn’t say what that more normal level might be.

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