June 23, 2017

Last Fed meeting's minutes show talk of paring bond holdings

06 April 2017, 02:35 | Clarence Schmidt

However, several participants now anticipated that meaningful fiscal stimulus would likely not begin until 2018.

No decisions about the bond holdings were made at last month's meeting, at which the Fed announced a modest increase in its benchmark short-term rate. The minutes showed that Fed officials mostly preferred to tie the change to the strength of the economy, and to gradually phase out reinvestments of the proceeds from the Treasury and mortgage-backed securities that mature, rather than suddenly ceasing reinvestments altogether. The Fed didn't lay out a timetable or specific plan for changing its reinvestment policy.

The minutes also showed that Fed officials had a briefing from staff over the central bank's massive $4.5 trillion balance sheet, which was quadrupled during the financial crisis and its aftermath as the central bank engaged in successive rounds of bond purchases as a way to lower long-term interest rates and give the weak economy a boost.

Trump has promised to lower corporate tax rates and spend at least $1 trillion on infrastructure but has provided little details.

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.

The voting members of the Fed's policy committee said they expected headline inflation might rise a bit above the 2% target in the near term, but only temporarily.

While FOMC members expected gradual economic growth, the minutes also show some disagreement over the near-term dangers of inflation.

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Others felt the Fed had largely met its inflation objective and that "a faster pace of scaling back accommodation" could be warranted.

"While the implications of prospective Fed rate hikes are most likely benign, key features of the current tightening cycle stand in stark contrast to historical experience - and could conceivably lead to more serious market and economic disruption", Oxford Economics said.

"The desire to signal sooner than later is likely a function of the committee's wish to avoid adverse market reactions", the Barclays note said.

"Fed officials remain split on the question of how much inflation pressure is now in the system. but it has become hard for doves to argue that the economy is still some way from full employment", he wrote.

"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. The yield on the 10-year Treasury rose to 2.38%, two basis points higher than just before the release.

Uncertainty around them was substantial, the Fed said. Dow Jones Industrial Average closed with modest losses, down 41.09 points, or 0.2%, to 20,648.15.

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