Fed Minutes: Balance Sheet Reduction Likely In "Couple Of Months"

"Several preferred to announce a start to the process within a couple of months", the minutes of the June 13-14 meeting released on Wednesday in Washington showed. The minutes show a Fed divided between officials comfortable with the unemployment rate undershooting their estimates about the sustainable level and those who fret that "a substantial and sustained unemployment undershooting" could trigger inflation or financial instability.

"Most participants viewed the recent softness in these price data as largely reflecting idiosyncratic factors.however, several participants expressed concern that progress.might have slowed and that the recent softness in inflation might persist", the Fed said in the minutes. The Fed also seemed confident that inflation will recover after recent soft readings. But economists and investors are increasingly questioning whether the economy is strong enough to warrant the Fed's relatively ambitious pace of rate hikes, as the Fed continues to forecast another rate hike this year and three more rate hikes each in 2018 and 2019. Market-based measures of inflation compensation remained low; survey-based measures of longer-term inflation expectations had changed little on balance.

A move to start putting the central bank's finances in order could be complicated if the economy doesn't respond as policy makers expect.

Since that meeting, final GDP figures for the first quarter showed economic growth was better than expected. They voted 8-1 to increase the federal funds rate by a quarter-point to a still-low range of 1 percent to 1.25 percent could lead to higher borrowing costs for consumers and businesses and slightly better returns for savers. This is because a rate hike can have an impact at a lag.

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As of Wednesday afternoon, markets were projecting a 97 percent chance that the Fed would remain on hold when it meets again in July.

William Dudley, the president of the Federal Reserve Bank of NY, has suggested the Fed might need to raise rates more quickly in order to achieve its goals. The Federal Reserve accumulated more than $4 trillion of securities after the financial crisis in a bid to make lending cheaper and stimulate the economy.

The plan, approved in June, involves the Fed slowly reducing its holdings by gradually allowing an increasing amount of proceeds from maturing securities to be run off the books each month.

  • Rita Burton