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Dudley, Kashkari say FOMC members eyeing balance sheet drawdown

Two top Federal Reserve officials indicated policymakers are moving toward a decision to begin reducing the size of the central bank's $4.5 trillion balance sheet.

"There is interest among [Federal Open Market Committee] members to start to shrink the balance sheet in a gradual and predictable way," Federal Reserve Bank of Minneapolis President Neel Kashkari said during a March 31 speech in Minneapolis, according to a Reuters report. After policymakers voted to lift their interest rate target range by a quarter point at their March meeting, the question of how and when the Fed will begin to reduce its assets holdings has received increasing focus from markets and policymakers.

Federal Reserve Bank of New York President William Dudley suggested on March 31 during a Bloomberg TV interview that policymakers could be prepared "some time later this year or some time in 2018, should the economy perform in line with our expectations ... to gradually let the securities mature rather than reinvesting them." Policymakers have long said ending that reinvestment policy would mark the first step to begin unwinding their asset holdings.

Dudley also said that the balance sheet normalization would be "passive" and mostly occur "in the background," though he said that it could impact the pace at which the central bank moves interest rates higher.

Kashkari and Dudley are both voting members on the FOMC this year. Kashkari voted against the rate hike announced in March, and argued that he still sees little reason for further rate hikes.

Dudley indicated that he still sees two more rate hikes this year as "reasonable" if the economy continues to improve.