Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis, said he supports the sale of mortgage-backed securities "slowly, over time," as a way to shrink the Fed's balance sheet now that a recovery is under way.
"If the Federal Reserve wants to normalize its balance sheet in the next five, 10, or even 20 years, it needs to supplement the passive approach with an active one," Kocherlakota said in a speech Tuesday in Bloomington, Minn. "In plain English, it will have to sell mortgage-backed securities."
The regional bank chief buttressed policymakers' view that the economy is recovering from the deepest recession in seven decades, and he went into further detail than Fed Chairman Ben Bernanke, who last month said gradual asset sales would be used to withdraw monetary stimulus.
"The economy has begun to normalize from the events of the past 30 months," Kocherlakota said at a Minnesota Chamber of Commerce luncheon. "It seems like a good time for the Federal Reserve to think about how to normalize policy."
One scenario would be to sell $15 billion to $25 billion of MBS a month, which would help return the Fed's balance sheet to a "normal size" and would be slow enough to "have little or no impact" on long-term interest rates, he said.