January 21, 2018

Fed weighing when to start selling off trillions in bonds

06 July 2017, 12:52 | Kara Nash

Mike Powell Getty Images

Mike Powell  Getty Images

Inflation on a 12-month basis was expected to remain somewhat below 2 percent in the near term, but nearly all members expected it to stabilize around 2 percent over the medium term.

Still, the decision to reduce the Fed's holdings came across as a sign of optimism for an economic recovery embarking on its ninth year. During the June meeting, officials noted the muted inflation levels, which they consider to be temporary and likely to rise over the long run to a targeted level of 2 percent. As the Fed raises rates, lenders have lowered borrowing costs, the opposite of the effect intended by the central bank. Most Fed officials expected the economy's growth to rebound significantly in the second quarter. Thus far, the Fed has not been dissuaded by lower inflation readings that suggest the economy may not be as strong as other economic indicators suggest.

The Federal Reserve's focus on raising interest rates risks limiting economic growth at a time when inflation trails the central bank's target, said Greg Peters, who helps oversee more than $650 billion at PGIM Fixed Income.

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

Members of the Federal Open Market Committee - the Fed's rate-setting panel - "generally reiterated" their support for continuing to gradually raise rates, according to the minutes.

In their forecasts, Fed officials have signaled another small rate increase is coming this year, and three more are expected in 2018 until the rate reaches about 2.1%.

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The minutes from the June meeting offered no new indications of when the next rate hike would come. This is because a rate hike can have an impact at a lag. This assessment would take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and global developments.

Fed officials updated their balance-sheet policy in the gathering, laying out a path of gradual reductions with caps.

Fed members have agreed on a drawn-out approach for doing this but the question of how soon to start divided the committee, according to the minutes.

Still, the unemployment rate dropped to 4.3 percent in May, a 16-year low.

Members "expressed a range of views" about the right timing of such cuts, with several preferring to "announce a start to the process within a couple of months", the minutes said.

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