Now may be good time for Fed to sell assets: Dallas Fed

By Ann Saphir

CHICAGO (BestGrowthStock) – The European debt crisis, and the investor flight to safe-haven U.S. government debt it has prompted, has handed the Federal Reserve an opportunity to shrink its bloated balance sheet and turn a profit at the same time, the Dallas Fed’s head of research said on Thursday.

The Fed bought more than $1.7 trillion in mortgage-backed and Treasury bonds as part of its bid to fend off the worst financial crisis in decades. Now that the U.S. economy has begun to grow again, Fed officials generally agree on the need to trim the U.S. central bank’s balance sheet, but they disagree on when and how fast.

With the recent influx of capital to the U.S. pushing down interest rates on Fed-held assets, now might be a good time, Harvey Rosenblum, Dallas Fed’s research chief, suggested in an interview with Reuters. Lower yields, and therefore higher prices, mean the Fed could sell the assets at a profit, he said.

“It may be that some of the rush to safety is temporary, but then again, the central bank has to learn to take advantage of those market driven opportunities,” he said, making it clear that he was not speaking for the U.S. central bank’s policy-setting Federal Open Market Committee, whose meetings he frequently attends along with Dallas Fed President Richard Fisher.

In May the Fed opened up dollar-lending lines to Europe to ease stress in the banking system there, but so far there has been little demand. Should borrowing pick up, he said, the Fed may feel the need to offset the lending by, among other possibilities, selling assets.

“The Fed didn’t go into this with a plan, that for every dollar that we had on our balance sheet we’ll find some other asset to sell off, but I must say as I stop and think about it, here’s a wonderful opportunistic situation to reduce the balance sheet of some of the long-term assets that we acquired in the last year or so,” Rosenblum said in the interview.

“What better time to sell it off, in small quantities,” he said.

Whether the idea actually gets on the agenda of the FOMC, which next meets later this month, is up to Fed Chairman Ben Bernanke, he said.

Asked how likely it is that Fisher or other regional Fed bank presidents might push for a discussion of the issue, Rosenblum said, “I can be more than reasonably sure that more than one person will bring up the subject.”

Stock Investing

(Reporting by Ann Saphir; Editing by Kenneth Barry)

Now may be good time for Fed to sell assets: Dallas Fed