Fed Worried About Risks Posed by Its Loose Policy, Minutes Show

Ashley Carr
July 6, 2017

US stocks and bonds were little changed Wednesday following the release of minutes from the Federal Reserve's June meeting that showed officials readying plans to start gradually shrinking the Fed's balance sheet in coming months.

But other members of the policymaking Federal Open Market Committee advocated for waiting until later this year to start slowly scaling back the Fed's $4.5-trillion balance sheet to allow more time to assess the state of the economy, the minutes of the June 13-14 meeting said. In fact, the minutes noted, financial conditions have actually eased even as the Fed tightens its interest rates - the opposite of what rate increases are theoretically supposed to do.

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.

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. As the Fed raises rates, lenders have lowered borrowing costs, the opposite of the effect intended by the central bank. They think the Fed will skip a rate hike that meeting.

"But the minutes might show that there's more disagreement about this view than the Fed leadership expresses in public".

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The increase was the Fed's second of the year and was taken as a vote of confidence in the USA economic recovery and future pace of growth. The rate-setting committee is next scheduled to meet to decide interest rate policy on July 25-26.

She said the Fed eager to keep increasing interest rates at a gradual pace to avoid a situation in which it would need to raise rates more quickly to offset inflation, which could destabilize the economy.

At the June meeting, the Fed gave a clear outline of its plan this year to reduce its portfolio but gave no precise timing. "A few participants expressed concern that subdued market volatility, coupled with a low equity premium, could lead to a buildup of risks to financial stability".

But others pushed for holding off on a decision "until later in the year", saying that kicking off the process too soon could send the signal that the Fed had moved away from its current plan to tighten policy only gradually.

Investors were watching the minutes for further clues as to when the Federal Reserve might begin to unwind its massive balance sheet.

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