The Federal Reserve Board will be able to influence interest rates through sales of the MBS it has accumulated over the past year, according to a Fed official.

Fed governor Donald Kohn said the Federal Reserve has no "shortage of tools" to tighten monetary policy and raise interest rates.

"And we can sell portions of our holdings of MBS, agency debt and the Treasury securities if we determine that doing so is an appropriate approach to tightening financial conditions when the time comes," Kohn said at the American Economic Association annual meeting in Atlanta.

Previously, Fed officials said their "oversized" balance sheet would shrink over time as the MBS matures or prepays.

As of mid-December, the Federal Reserve had purchased $1.1 trillion in Fannie Mae, Freddie Mac and Ginnie Mae MBS and $157.7 billion in Fannie, Freddie and Federal Home Loan Bank agency debt. The Fed is planning to end its purchases of MBS by March 31.

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