Fed plans to shrink balance sheet this year, minutes show

Minutes from the March Federal Reserve Open Market Committee (FOMC) meeting revealed that participants in general felt that the economic outlook had changed little since January with further strengthening of the labour market and progress towards the inflation target.

The Fed could reduce its balance sheet during its March meeting, including the possibility of ending its policy of reinvesting principal payments.

The Fed's decision to boost its key policy rate by a quarter-point in March left it in a range of 0.75 percent to 1 percent. The Fed didn't lay out a timetable or specific plan for changing its reinvestment policy.

The minutes show "several" of the hawks urged the Fed to raise rates at a faster pace since the central bank was on the cusp of meeting its 2% inflation goal. Fed officials have argued that the recent recovery in oil prices appears to be driving increases in inflation, and that energy prices can fluctuate significantly. Unemployment is now below the Fed's 4.8 percent goal, while inflation has remained below the Fed's 2 percent inflation goal for several years.

However, the Fed doesn't believe that Trump will be able to get results this year. The FOMC also forecast two more rate hikes this year.

Trump has promised to lower corporate tax rates and spend at least $1 trillion on infrastructure but has provided little details.

Some Fed officials thought the inflation target might be achieved by year's end. Congress and the White House had closer agreement on health-care policy than a tax overhaul, he said, according to Reuters.

"Several participants now anticipated that meaningful fiscal stimulus would likely not begin until 2018", the minutes said, "and about half of the participants did not incorporate explicit assumptions about fiscal policy in their projections".

The minutes showed that Fed officials grappled during their discussions with two big uncertainties facing the US economy: Whether it would be safe to let inflation rise faster for a while and how to assess the effects of President Donald Trump's ambitious economic stimulus plans. However, officials pointed to upcoming elections in Europe, which could trigger the exit of more countries from the euro zone, as a possible risk to the global economy.

The minutes make it clear that shrinking the $4.5 trillion balance sheet will be a priority in the coming years, but probably would start very gradually and not until late this year at the soonest. "That's another reason I think they would like to get this plan articulated, announced and on its way before Yellen leaves", he said.

  • Joey Payne