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

The Dow Jones industrial average, S&P 500 index and Nasdaq composite were slightly higher in early trading on the stock market today, after giving back solid gains to close in the red on Wednesday following release of the March 14-15 Fed meeting minutes.

This desire is a big reason why the committee wants to wait until rate hikes are "well under way" before reducing the balance sheet: it needs enough space to either hike or cut rates in order for rates to be the primary policy tool.

"I think the operative word here is going to be gradual".

The minutes also showed some disagreement among central bankers over the near-term dangers of inflation, a subject that had divided Fed members in mid-2016.

As the USA central bank seems prepared to tackle unwinding its bond holdings, primary dealers see the Fed raising interest rates two more times by year end and three times in 2018.

Uncertainty around them was substantial, the Fed said. We expect the balance sheet will still be significantly larger than it was pre-crisis, but no more than about half of the current $4 trillion amount.

The record provides an outline of the discussion USA central bankers held before approving a quarter-point increase in their benchmark lending rate.

"One or two Fed officials have indicated that they would like to begin the balance sheet normalisation after a further two rate hikes".

Members of the committee said this reduction should be made by stopping reinvestment of bonds that mature, rather than outright selling, and "judged that a change to the committee's reinvestment policy would likely to be appropriate later this year".

The minutes showed almost all of the officials judged the economy was at or near full employment, and almost all voting members believed inflation was still short of the Fed's 2 percent target.

The Fed's holdings of assets, including long-term debt and mortgage-backed securities, have swollen from less than $1 trillion to around $4.5 trillion since massive quantitative easing began shortly after the collapse of Lehman Brothers in 2008.

The minutes also revealed that officials were divided over how to approach inflation and the economic impact of President Donald Trump's policy agenda. Others argued that since inflation had run below 2 percent for so long, it would do no harm to allow prices to rise above 2 percent for a time.

The minutes showed that the Fed officials see more upside risks to the economic outlook, on the expectation of more expansionary fiscal policies and diminished risks from overseas economies. This expectation, amidst a rising interest rate cycle, would continue to push Federal fund rates higher and strengthen the U.S. dollar in the longer term.

Eight of 17 dealers saw the Fed lifting rates to 1.25-1.50 percent by the end of the third quarter, while 16 of 17 expected that rate range to be reached by year end.

While most believed his plans had the potential to boost growth, some said there were also downside risks from a possible adverse economic reaction from Mr. Trump's measures to limit immigration and to increase trade barriers to protect American workers.

  • Zachary Reyes