Fed Minutes: FOMC Eyes Change to Debt Holdings Policy Ahead

Minutes published last night from the March meeting of the federal open market committee, at which the Fed voted nine to one to raise interest rates, also showed that members had discussed whether to phase out or halt reinvestments all at once.

Because shrinking the balance sheet could cause long-term rates to rise and threaten economic expansion.

Most Federal Reserve officials think the USA central bank should reduce its 4.5 trillion dollars of balance sheet later this year, if economy continues to perform as expected, minutes of the Fed's latest monetary policy meeting showed Wednesday.

When analysts and observers of the USA economy discuss the Federal Reserve's policy moves, they often point to the federal funds rate-the bank-to-bank lending rate that's closely followed by interest rates on mortgages, credit card debt and other loans, which the Fed raises to rein the economy in during times of steady growth.

The Fed undertook its massive asset purchasing program during the global financial crisis as a means of holding down interest rates and spurring growth. But financial markets have been closely watching for any Fed signal on the timing of when the Fed would begin reducing the level of its bond holdings by halting its current practice of replacing any maturing bonds.

In the minutes, nearly all policymakers agreed that the timing of a change in balance sheet policy would depend on economic and financial conditions and generally preferred to taper or stop investments in both Treasury and mortgage-backed bonds.


With continued economic growth and gradual rate hikes, most meeting participants believed a shift in balance sheet policy "would likely be appropriate later this year", the minutes said.

President Donald Trump arrived in the White House with an agenda pledging corporate tax cuts, infrastructure spending and slashed regulation, but such policies have yet to take shape. But some said there were also downside risks from a possible adverse economic reaction resulting from Trump's measures to limit immigration and increase trade barriers to protect American workers.

On inflation, the minutes showed that some Fed officials anxious that if unemployment, now at a low of 4.7 percent, fell even further, it could pose a "significant upside risk" of higher inflation.

The release of the minutes came a day after the sudden resignation of FOMC member Jeffrey Lacker - the president of the Richmond Federal Reserve Bank - who admitted to a role in the leak of confidential minutes meetings in 2012. In March, the Fed raised its benchmark interest rate for the second time in a year and said it expects two more rate hikes this year and three more next year.

"At the same time, several participants cautioned that upcoming elections in European Union countries posed both near-term and longer-term risks", the minutes said.

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