The Federal Reserve's plan to start reducing its unprecedented large balance sheet "should begin relatively soon," Chairwoman Janet Yellen said Wednesday while presenting a semiannual report to Congress.
Ms. Yellen told the House Financial Services Committee that unwinding a $4.5 trillion-plus balance sheet that includes $2.5 trillion in Treasuries and the rest in mortgage-backed securities will probably take until 2022 before it shrinks to pre-crisis levels. Fed officials have not decided yet on longer-term policy framework that will affect the size of reserves, she said.
"We do believe that the asset purchases were very effective in holding down rates," Ms. Yellen said. While she told the committee that Federal Reserve policy officials "may want to increase the federal funds rate a bit over time," she also said that "the new normal, as it relates to the federal funds rate, appears to be relatively low."
With expected lower future growth and Ms. Yellen's caution that the ultimate interest rate to balance supply and demand may be lower than expected, "if you're counting on a 5% rate on your (10-year) Treasury bonds, you may not want to hold your breath," said Putri Pascualy, managing director and partner with Pacific Alternative Asset Management Co.
Aaron Anderson, senior vice president of research at Fisher Investments, said in emailed comments that he expects the market will take her comments in stride. "The further we get into the rate hike cycle, the less investors are likely to fret each move. The Fed was never responsible for propping up the economy or the equity bull market. The faster investors can shed those misguided notions, the more confident they'll become," Mr. Anderson said.