Fed's Kaplan Says MBS and Treasuries Should Both Be Rolled Off

(Bloomberg) -- Federal Reserve Bank of Dallas President Robert Kaplan said the central bank should roll off both mortgage-backed securities and Treasury holdings when it begins to let its balance sheet shrink.

“Each is a different market, the sizes and daily market volumes are different in each” and “I would be advocating that we allow both of those to run off,” Kaplan said, speaking with reporters after an event in Chicago.

“We just have to tailor our plan to each of those types of securities,” he said, adding: “Our plan should be to address both of those types of securities, and have an announced plan for how we'll allow each of those to run off.”

Kaplan, who also said that he sees the Federal Open Market Committee's median expectation for three rate increases as a “reasonable baseline” for the year, said the time to announce a balance sheet plan is drawing closer.

Policy makers discussed their plans for the Fed's $4.5 trillion in assets but made no decisions at their March 15 meeting, leaving investors and economists guessing at when and how they'll begin to allow securities to mature without reinvestment.

“We're approaching a period where we'll have made some further progress and we'll be able to make an announcement on our plans for the balance sheet,” Kaplan said Thursday.

Asked whether he's concerned about the possibility of a market dislocation in response to the Fed's strategy for the balance sheet, Kaplan said “it's very important that we make a clear announcement, when we do” and that “it's very critical that our plan for the balance sheet is patient and gradual, and try to minimize disruptions.”

Many FOMC members have said they'd prefer to let balance sheet runoff occur in the background while they continue to use the funds rate as their primary monetary policy rule. Still, Minneapolis Fed President Neel Kashkari has warned that even announcing a plan could lead to tightening in financial conditions.

Asked whether the Fed will announce how small it wants the balance sheet to get before it starts to shrink it, Kaplan said “we might make some comments along those lines. There are a number of factors, in terms of changes in global financial assets, some of the programs we run.”

“We're discussing it and we'll make some judgements about it,” he added.

To contact the reporter on this story: Jeanna Smialek in Washington at jsmialek1@bloomberg.net.

To contact the editors responsible for this story: Brendan Murray at brmurray@bloomberg.net, Randall Woods