US Fed signals shift in balance sheet policy

Federal Reserve officials have indicated they may shift away from a post-financial crisis investment policy that built a $4.5 trillion portfolio to help boost economic growth, minutes from their latest meeting showed  

Washington: Federal Reserve officials have signalled they may shift away from a post-financial crisis investment policy that built a $4.5 trillion portfolio to help boost economic growth, minutes from their latest meeting showed.
At their March policy meeting, central bankers also said they continued to see “considerable uncertainty” about the effects of possible fiscal stimulus from the Trump administration.
Word of the planned shift on balance sheet policy helped send Wall Street lower, with the major stock indices erasing gains made earlier in the day.
The minutes recorded the views of policymakers expressed at a March 14-15 meeting, when they voted to raise the target range for their benchmark interest rates to 0.75-1.00 per cent in order to head off mounting inflation.
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.
But policymakers were split on how quickly to slow or phase out reinvestments in Treasury bills and mortgage-backed securities.
The Fed undertook its massive asset purchasing programme during the global financial crisis as a means of holding down interest rates and spurring growth. Finally reversing this policy itself could have the effect of an interest rate hike, accounting for Wall Street’s dimmed exuberance on Wednesday.
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.
The most recent projections from the Federal Open Market Committee, which sets the Fed’s benchmark rates, were for a total of three rate hikes in 2017. “Participants continued to underscore the considerable uncertainty about the timing and nature of potential changes to fiscal policy,” 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.
Parts of his agenda, such as health care — which has considerable consequences for taxation — have stalled amid divisions in the majority Republican Party.
“Several participants now anticipated that meaningful fiscal stimulus would likely not begin until 2018,” the minutes said.
While FOMC members expected gradual economic growth, the minutes also show some disagreement over the near-term dangers of inflation.
The Fed’s preferred inflation measure, the Personal Consumption Expenditures price index, has moved steadily towards the Fed’s two per cent target, adding to pressure on the central bank to raise rates. — AFP