Narayana Kocherlakota, Columnist

The Fed Is Making a $2 Trillion Mistake

Reducing its bond holdings will leave the economy vulnerable.

May 16, 2017 at 11:30 AM UTC

Narayana Kocherlakota is a Bloomberg Opinion columnist. He is a professor of economics at the University of Rochester and was president of the Federal Reserve Bank of Minneapolis from 2009 to 2015.

Be prepared.
Photographer: Andrew Harrer/Bloomberg

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Sometime later this year or early in 2018, the U.S. Federal Reserve intends to embark on an unprecedented maneuver: Reducing the vast bond holdings that it has accumulated in its efforts to support the economy over the past decade. I think this is a mistake, in both concept and implementation.

The reduction is likely to be large. Fed officials have suggested that it would be appropriate to shrink the balance sheet, which currently exceeds $4 trillion, by $2 trillion or more over the next few years. They plan to do so in large part by letting bonds mature and not replacing them with new purchases.