US Federal Reserve Chair Yellen says Fed's bond holdings will likely remain at high levels for up to eight years after it starts raising short-term interest rates, making it clear that Fed's US$4.3T investment portfolio will decline only gradually

WASHINGTON , May 9, 2014 () – Federal Reserve Chair Janet Yellen said Thursday that the Fed's bond holdings will likely remain at high levels for up to eight years after it starts raising short-term interest rates.

Yellen made clear that the Fed's investment portfolio, now at a record $4.3 trillion, will decline only gradually. She said it could take five to eight years for the portfolio of Treasury bonds and mortgage-backed securities to return to the level in 2008 before the Fed began aggressively buying bonds.

The bond purchases were intended to lower long-term borrowing rates to stimulate a weak economic recovery. The Fed has gradually lowered the pace of its monthly purchases from $85 billion to $45 billion.

Yellen was responding to a question posed at a Senate Banking Committee hearing. She testified to Congress for a second day about the Fed's economic outlook.

As she told the Joint Economic Committee on Wednesday, Yellen said the U.S. economy is improving after emerging from a harsh winter that slowed growth during the January-March quarter. But she said that even with the drop in the unemployment rate to 6.3 percent in April from 6.7 percent in March, the job market remains "far from satisfactory."

She told the Banking Committee that as a result, she expects the Fed's near-zero target for short-term interest rates to remain appropriate for a "considerable time" after the new bond purchases end.

As the economy has improved, the Fed has trimmed its bond purchases in four $10 billion reductions to the current monthly pace of $45 billion. Yellen has said she expects the Fed to end its bond purchases altogether this fall.

But she and other Fed officials have stressed that the central bank will keep reinvesting the interest from the bonds already on its books. That means that while the Fed's support for the economy won't be increasing, it will remain at a high level.

Yellen was questioned Thursday by Sen. Charles Grassley, R-Iowa, about when the Fed would decide to begin selling its bond holdings and thus reduce the support it's provided to keep long-term borrowing rates low.

She said the Fed could manage the reduction in its bond holdings by not reinvesting bonds as they mature. With this approach, "it would probably take somewhere in the neighborhood of five to eight years to get (the Fed's investment portfolio) back to pre-crisis levels."

The Fed held a regular meeting of its interest-rate panel last week. The panel is composed of members of the Fed's board in Washington and five of the 12 Fed regional bank presidents.

The Fed disclosed that its board also met alongside the two-day meeting of the interest-rate panel. That has stirred speculation that the Fed was discussing possible updates to its exit strategy. Any such changes could be revealed when the Fed releases the minutes of its meeting on May 21.

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