April 16 (Bloomberg) -- Philadelphia Federal Reserve Bank President Charles Plosser said an eventual withdrawal of Fed stimulus should include sale of securities on its balance sheet and a return to the federal funds rate as the main policy tool.
“I am uncomfortable declaring at this point that we would not engage in sales” of securities, Plosser said today in a speech in Beijing. “We should return to an operating framework in which the federal funds rate is our policy instrument, we should shrink the size of our balance sheet consistent with this framework and we should shorten the duration and return the composition of our portfolio to all Treasuries.”
Chairman Ben S. Bernanke said in congressional testimony in February the Fed will review its exit strategy and may decide to hold bonds on its balance sheet to maturity. The Fed is buying $85 billion in Treasury securities and mortgage bonds each month to stoke growth and bring down unemployment, pushing its balance sheet to a record $3.23 trillion.
Plosser, in remarks prepared for the speech at a conference co-sponsored by the San Francisco Fed, said he backs a plan for withdrawing monetary stimulus adopted by the Federal Open Market Committee in 2011. He does not vote on policy this year.
Before reducing accommodation, the Fed should raise the discount lending rate to bring back to pre-crisis levels the spread of the rate over the target interest rate, Plosser said. He also said the Fed could reinvest maturing long-term assets into shorter-term assets to gain more flexibility in managing its balance sheet.
Plosser didn’t discuss the current economy, other than noting that it’s grown stronger in the two years since the central bank announced the exit plan.
“Economic conditions have improved, but the pace has been uneven,” he said.
The Philadelphia Fed chief said one concern with asset sales is that they could result in losses and reduced remittances to the U.S. Treasury.
“Although negative remittances would not impair the Fed’s ability to implement monetary policy, they may impose significant political risk for the institution,” he said.
Plosser, 64, became president of the Philadelphia Fed in August 2006. He was previously dean of the graduate school of business administration at the University of Rochester in New York State. The Philadelphia Fed will next have a vote on policy decisions in 2014.
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