Fed likely to sell assets, slowly: Kocherlakota

HELENA, Mont., April 8 (BestGrowthStock) – The Federal Reserve Bank
will likely need to sell a “nontrivial” amount of assets to
return its balance sheet to normal in the next two decades, but
will need to do so slowly or risk causing a jump in interest
rates, a top Fed official said on Thursday.

Narayana Kocherlakota, president of the Minneapolis Federal
Reserve Bank, also said that while the U.S. economic recovery
is underway, housing will take a long time to recover and the
outlook for unemployment is “not promising.”

His prepared remarks for delivery to business leaders at
the regional bank’s branch office in the Montana state capital
were nearly identical to those delivered at the Minnesota
Chamber of Commerce on April 6.

Fed officials agree that the central bank should trim its
balance sheet and resume its pre-financial-crisis policy of
holding only Treasury securities, Kocherlakota said. A monthly
pace of $15 billion to $25 billion worth of sales in
mortgage-backed securities over a five-year period would be
slow enough to accomplish an exit from the mortgage business
without rocking interest rates, he said.

“I am optimistic that we will be able to normalize our
balance sheet by the end of the teens,” he said.

The U.S. central bank trimmed its key short-term
interest-rate target to near zero in December 2008 to help
blunt the effects of a deepening recession.

It also bought more than $1 trillion of mortgage-backed
securities issued by government-sponsored housing lenders,
primarily Fannie Mae and Freddie Mac, in a bid to lower
long-term interest rates and support the housing market.

Kocherlakota, who is not a voting member this year of the
Fed’s monetary policy-setting Federal Open Market Committee,
repeated his forecast for 3-percent annual growth in the U.S
economy for the next two years, a more pessimistic view than
many other economists.

“The economy is on the mend and should continue to recover
over the next two years – in terms of both GDP and unemployment
– but at slower rates than we would like,” he said.

On the positive side, he said, inflation has been
“relatively tame” and the outlook is promising if the Fed and
Congress work together appropriately.

Stock Market Basics
(Reporting by Ann Saphir, Editing by Chizu Nomiyama)

Fed likely to sell assets, slowly: Kocherlakota