Associated Press

NEW YORK — A top Federal Reserve official suggested Monday that the Fed will likely announce next month that it will begin paring its bond portfolio – a step that could lead to slightly higher rates on mortgages and other loans.

In an interview with The Associated Press, William Dudley, president of the Federal Reserve Bank of New York, said he thinks the Fed has adequately prepared investors for a reduction in the portfolio, which swelled after the 2008 financial crisis as the Fed bought bonds to reduce long-term rates. With the economy now much healthier, the Fed is ready to begin trimming its bond holdings.

Dudley also said that he would favor a third increase this year in the Fed’s benchmark short-term rate if the economy remained strong. Many investors expect a modest rate hike in December, to follow the Fed’s previous increases in March and June this year.

Speaking of the Fed’s likely September announcement that it will begin shrinking its $4.5 trillion bond portfolio, Dudley expressed confidence that investors would react calmly to the prospect of modestly higher rates on some consumer and business loans.

Dudley pointed out that the Fed spelled out to investors months ago the system it plans to use to reduce the portfolio gradually.

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“The plan is out there,” he said during an interview at the New York Fed. “It’s been generally well-received and fully anticipated. People expect it to take place.”

As president of the Fed’s New York regional bank, Dudley is an influential voice on interest-rate policy. He is vice chairman of the central bank’s policy panel that sets interest rates and is a longtime close ally of Fed Chair Janet Yellen.

His interview with the AP comes at a time when the Fed has essentially met one of its two mandates: To maximize employment. The unemployment rate is at a 16-year low of 4.3 percent, and job growth remains consistently solid.

Yet the Fed has so far failed to meet its second objective of keeping prices stable. Inflation has stayed chronically below the Fed’s 2 percent target rate – a problem because consumers often delay purchases when they think prices will stay the same or even decline.

In its latest reading, the Fed’s preferred inflation gauge was just 1.4 percent year over year. Dudley said Monday that he still thinks inflation will rise toward the Fed’s target level as the job market strengthens further and sluggish wage growth begins to pick up.


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