Fed Minutes Will Be Parsed for News on Balance Sheet Plans

Mike Powell  Getty Images

Federal Reserve officials are discussing a timeline to begin cutting the central bank's $4.5 trillion portfolio, according to minutes from their June meeting. Others pushed for more time to first see how the broader US economy fares during the second half of 2017. Officials noted that communicating the Fed's plans "had helped prepare the public for such a step".

"It's very clear that the Fed wants to remain vague", said Lindsey Piegza, chief economist at the financial firm Stifel Fixed Income.

"Fed members went back and forth on the state of the economy, with some agreeing that the drop in the unemployment rate is tinder for eventual inflation while others were less anxious", said Peter Boockvar, chief market analyst with The Lindsey Group, in a client note.

The Fed's holdings have surged five-fold since 2008, ballooning in size as the Fed bought Treasury and mortgage bonds.

Officials also disagreed about the likely impact, with some arguing balance sheet reductions were effectively a substitute for rate increases, while others predicted only a modest economic impact.

Fed officials, led by chair Janet Yellen, appear to have felt reasonably confident about the economy in June. But some participants said they were "less comfortable" with the pace of tightening.

The Fed voted in June to raise short-term rates by a quarter point to a range of 1 to 1.25 percent, the third quarter in a row the bank has lifted rates.

Of the officials voting on the rates, only Minneapolis Fed President Neel Kashkari objected.

The minutes also indicated that members generally supported the Fed's current strategy for slowly implementing rate hikes.

The Fed's forecast for consumer price inflation was revised down slightly for 2017 but the projection was little changed thereafter, as the recent weakness in inflation was viewed as transitory.

The minutes acknowledged what it described as "surprisingly low recent readings" on inflation, but it said that most officials continued to expect a return to normal. The increase of 0.25 percentage point raised the rate to between 1% and 1.25%. Job gains had moderated but had been solid, on average, since the beginning of the year, and the unemployment rate had declined. Most Fed officials expected the economy's growth to rebound significantly in the second quarter. It can take a lot of action and not hurt the stock market. A few others expressed concern that "subdued market volatility" could lead to financial stability risks.

After that meeting, the Fed announced it planned to start reducing the balance sheet sometime this year but provided no timetable.

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