Fed Minutes: Balance Sheet Reduction Could Start Late 2017

The central bankers now expected President Donald Trump's plans for expansionary fiscal policy would likely not begin until 2018.

The group made a decision to keep signaling that future rate hikes would be gradual but be prepared to respond quickly to changes in the economic outlook.

While Fed officials were prepared for a weak first-quarter GDP reading, they believed any slowdown in the first quarter was temporary.

The Federal Reserve is ready to start to shrink their bloated $4.5 trillion balance sheet this year, the minutes of the March monetary policy meeting revealed Wednesday. The minutes showed that Fed officials mostly preferred to tie the change to the strength of the economy, and to gradually phase out reinvestments of the proceeds from the Treasury and mortgage-backed securities that mature, rather than suddenly ceasing reinvestments altogether.

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. An approach that phased out reinvestments was seen as reducing the risks of triggering financial market volatility or of potentially sending misleading signals about the Committee's policy intentions while only modestly slowing reductions in the Committee's securities holdings. The minutes indicated that this change could be announced later this year.

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"While the implications of prospective Fed rate hikes are most likely benign, key features of the current tightening cycle stand in stark contrast to historical experience - and could conceivably lead to more serious market and economic disruption", Oxford Economics said. " ... some participants and their business contacts saw downside risks to labor force and economic growth from possible changes to other government policies, such as those affecting immigration and trade".

The minutes from the Fed's March meeting showed continued uncertainty about how the White House's policies would affect the economy, with only about half of the Fed's voting members incorporating assumptions about fiscal policy into their economic projections. The Fed's dual mandates are to achieve maximum employment and moderate inflation.

The voting members of the Fed's policy committee said they expected headline inflation might rise a bit above the 2% target in the near term, but only temporarily.

In its March meeting, the Fed raised interest rates for the second time in three months, shifting to a faster pace of rate hikes under the Trump administration as the job market is strengthening and inflation is rising toward its target of 2 percent. The next meeting is May 2-3.

  • Megan Austin