Tuesday, 21 November, 2017

Fed Minutes: Balance Sheet Reduction Likely In "Couple Of Months"

Mike Powell  Getty Images Mike Powell Getty Images
Lance Thomas | 06 July, 2017, 00:08

The following is an excerpt covering the Federal Open Market Committee's discussion of monetary policy taken from the minutes of the FOMC's June 13-14 meeting, which were released on Wednesday.

Federal Reserve Chair Janet Yellen is "torn" on whether to raise interests rates again this year, CNBC's Jim Cramer said Wednesday, but the economy indicates policymakers have room to do what they want.

But a few Fed officials were less comfortable than the prospect of higher rates as implied by the central bank's June projections, saying that too quick a path might prevent a "sustained" return to inflation at that level. The minutes show concern that financial conditions have remained loose even as the Fed's been hiking interest rates.

"Inflation on a 12-month basis had declined recently and was running somewhat below 2 percent". The minutes noted, however, that "several participants expressed concern that progress toward the committee's 2 percent longer-run inflation objective might have slowed and that the recent softness in inflation might persist".

"These views suggest that a third rate hike this year remains a solid base case, but also that such a hike is unlikely to come before the December meeting", said Roberto Perli, an economist at Cornerstone Macro.

The minutes also showed central bankers divided over precisely when to begin reducing the Fed's massive balance sheet, a task that they have indicated they will begin before the end of the year.

The strengthening job market left majority comfortable with raising a key short-term rate last month. Most Fed officials expected the economy's growth to rebound significantly in the second quarter.

What Fed officials all agreed upon in June was to publicly unveil its plan to gradually reduce the portfolio of bonds that build up after the Great Recession - part of an effort to make long-term borrowing more affordable and spur growth.

Some members of the Federal Open Market Committee, which sets the benchmark United States interest rate, also expressed concern that Wall Street stocks were overvalued. But at some point, increases to the Fed's benchmark interest rate and reductions to its balance sheet will begin to affect bond markets and raise the price of loans for everyday Americans, he said.

This could argue against maintaining low interest rates, which could favor "a buildup of risks to financial stability", the minutes said.

For agency and mortgage-backed securities debt, the cap starts at $4 billion, and rises by $4 billion every three months until it hits a $20 billion a month.

The Fed's next meeting is July 25-26.

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