While Federal Reserve officials ponder when to raise short-term interest rates again, they are beginning to wrestle with another big policy decision—whether this is the year to start shrinking their immense portfolio of mortgage and Treasury securities.
The Fed has boosted its portfolio of long-term bonds and other assets to $4.45 trillion from less than $1 trillion in 2007, just ahead of the financial crisis. Officials believe the large portfolio has helped to spur economic growth by holding down long-term interest rates.
With the economy closer to healed from the financial crisis and recession, the central bank has already begun raising short-term rates. Fed Chairwoman Janet Yellen has said the Fed would reduce the bondholdings once interest rate increases were “well under way.” Many officials hope to get the portfolio back to some state of precrisis normalcy.
A great deal is at stake with the bond decision. Shrinking the portfolio could jolt financial markets, pushing up interest costs on government debt and mortgage bonds and reverberating through the broader economy.