Optimal Fed path: sell MBS inventory gradually

The Fed is divided over whether to sell off its mortgage backed securities inventory. Selling it too soon, or not at all, would have an impact on liquidity and short-term interest rates. Narayana Kocherlakota, president of the Minneapolis Fed, has the best recommendation, and it should be followed: sell $15 billion-25 billion of MBS each month. If performed regularly, this rate of divestment would take the Fed’s inventory to zero in about five years, and reduce the Fed's leverage and balance sheet, putting back into a position to intervene again should it need to.