Fed minutes reveal debate over inflation and Trump

Miranda GreerApr 06, 2017

The minutes reveal that central bank officials had an in-depth discussion of the technical details of the balance sheet policy, including whether to phase out reinvestment of principal payments or do it all at once.

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

The Fed has been keeping the level of its balance sheet steady at $4.5 trillion, compared with less than $1 trillion before the financial crisis.

With improving economic conditions, the Fed increased interest rates by 25 basis points on March 15.

The Fed, chaired by Janet Yellen, bought Treasury and mortgage-backed bonds on a hitherto unprecedented scale in the wake of the financial crisis to help to keep interest rates low and to encourage job creation and economic growth.

The minutes showed that Fed officials received a staff briefing on managing its $4.5 trillion bond portfolio.

As the economy gathers strength, the Fed aims to gradually remove its support and let the economy stand on its own.

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.

Mainly, though, the Fed is signaling confidence in the state of the economy and a desire to normalize policy as inflation and the labor market approach their targets.

The Fed's preferred inflation measure, the Personal Consumption Expenditures price index, has moved steadily towards the Fed's two percent target, adding to pressure on the central bank to raise rates.

On inflation, the minutes showed that some officials anxious that if unemployment, now at a low 4.7 percent, fell further, it could pose a "significant upside risk" of higher inflation.

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. If the measures do come later this year, it's possible the Fed would have to raise rates more quickly to offset inflation. Congress and the White House had closer agreement on health-care policy than a tax overhaul, he said, according to Reuters. However, several participants now anticipated that meaningful fiscal stimulus would likely not begin until 2018.

"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.

Downside risks from the global economy were seen to have diminished.

Because shrinking the balance sheet could cause long-term rates to rise and threaten economic expansion. The balance sheet is "not a tool that we would want to use as a routine tool of policy", she said.

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