With Liftoff Done, the Fed Revisits a $4.5 Trillion Quandary

Federal Reserve officials who spent months debating their first interest-rate increase in almost a decade are turning next to the thorny question of what to do with a balance sheet equivalent to the size of Japan’s economy.

... The Fed’s balance sheet swelled to $4.5 trillion in 2014 from about $900 billion in 2008 on purchases of Treasuries and mortgage-backed securities, during three stages of a strategy known as quantitative easing.

The Fed keeps its assets at that level by reinvesting the proceeds of maturing debt, a tactic it pledged to end when rate hikes are “well under way.” Some private economists define that as a federal funds rate, currently in a range of 0.25 percent to 0.5 percent, of at least 1 percent, and probably higher. Dudley said there shouldn’t be a “numerical tripwire” for ending the program, and economic conditions should shape the decision.

... “Well under way’ doesn’t mean one or two rate hikes,” said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey. “The expected trajectory of rate hikes has gotten flatter and that means 2017, not 2016” for allowing run-off to begin, he said.