Powell says U.S. Fed could start to shrink balance sheet later this year

U.S. Federal Reserve Chair Jerome Powell said on Tuesday that the central bank could start to shrink its balance sheet later this year.

"We're going to end our asset purchases in March, meaning we'll be raising rates over the course of the year," Powell said at his confirmation hearing before the Senate Banking Committee.

"At some point, perhaps later this year, we will start to allow the balance sheet to run off, and that's just the road to normalizing policy," Powell said, adding the U.S. economy "no longer needs or wants" the Fed's very highly accommodative policies.

"The economy is in a completely different place than it was when we ended asset purchases the last time, so the period of time between stopping purchases and beginning runoff will be shorter, and also the balance sheet is much bigger so the runoff can be faster," he said.

Esther George, president of the Federal Reserve Bank of Kansas City, also believed that it will be appropriate to move earlier on the balance sheet relative to the last tightening cycle.

"An approach of raising rates while maintaining an outsized balance sheet could flatten the yield curve and distort incentives for private sector intermediation, especially for community banks, or risk greater economic and financial fragility by prompting reach-for-yield behavior from long-duration investors," George said on Monday.

The Fed began in November to reduce its monthly asset purchase program of 120 billion U.S. dollars by 15 billion dollars. In December, the central bank laid out a plan to reduce its monthly asset purchases by 30 billion U.S. dollars starting in January, doubling the pace it announced a month earlier, in response to rising inflation pressures.

That plan put the central bank on track to end asset purchases by March, three months earlier than initially planned, as it exits from the ultra-loose monetary policy enacted at the start of the pandemic.

As of last week, the size of the Fed's balance sheet has increased to over 8.7 trillion dollars, more than double the amount compared with early 2020, according to the central bank.

U.S. President Joe Biden announced in November that he intends to nominate Powell for a second term as Fed chair and to nominate Fed governor Lael Brainard as vice chair. Biden is also expected to soon nominate three new governors to fill remaining vacancies on the seven-member Fed board, according to local media.