06 April, 2017
The Federal Reserve is looking to reduce its $4.5 trillion stockpile of government- and mortgage-backed bonds later this year, according to minutes of the March policy meeting released Wednesday.
At the March 14-15 meeting, FOMC members voted at the meeting to raise interest rates a quarter-point while projecting two further rate hikes this year.
The Fed bought Treasury and mortgage-backed bonds on an unprecedented scale in the wake of the financial crisis to help keep interest rates low to spur hiring and growth.
"Provided that the economy continued to perform about as expected, most participants anticipated that gradual increases in the federal funds rate would continue and judged that a change to the Committee's reinvestment policy would likely be appropriate later this year", the Fed said in the minutes.
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Interestingly, some members of the Fed also noted that seemingly non-economic policies that Trump has thrown around could end up weighing on economic activity.
The minutes said that because of the "substantial uncertainties" about the outlines of the program that might eventually emerge from Congress, about half the Fed officials had included no assumptions about Trump's efforts in their economic forecasts.
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Members, however, mostly agreed that any meaningful fiscal stimulus and its effect on the economy would not likely start until the beginning of next year.
The central bank made a decision to raise the federal funds rate for the third time since 2008 in a near unanimous call during its meeting in March. Investors generally see the reduction in the Fed's balance sheet leading to higher rates.
Some at the March meeting pointed out that "core" inflation, excluding volatile food and fuel prices, appeared tame and could take time before settling at or above the target level.
Ian Shepherdson of Pantheon Macroeconomics said the minutes showed policymakers still could not agree on how much slack remained in labor markets. The Fed's dual mandates are to achieve maximum employment and moderate inflation.
"The FOMC minutes were clear that officials are contemplating beginning to address the balance sheet", said Win Thin, an economist at Brown Brothers Harriman.
The development may raise the temperature for the Fed, observers said, with hostile lawmakers in Washington threatening to audit the central bank or take measures some critics say could curtail its independence. The yield on the 10-year Treasury rose to 2.38%, two basis points higher than just before the release.