Fed ready to start divesting its bond holdings

Short-term interest rates might be raised at next meeting in mid-June

WASHINGTON — Federal Reserve officials signaled in discussions early this month that they would likely start reducing the Fed’s huge portfolio of bond holdings later this year, a step that could cause borrowing rates to rise.

At the same time, the Fed appears to be on track to resume raising its key short-term interest rate when it next meets in mid-June.

The minutes of the Fed’s May 2-3 meeting, released Wednesday, show that officials not only discussed beginning a reduction of bond holdings this year but expressed approval for a plan on how the bond sales should proceed.

The Fed would set a cap on the size of maturing bonds to be sold each month and a schedule for gradually raising the cap. The goal would be to minimize the effect of the bond sales on loan rates paid by consumers and businesses. Typically, a sell-off of the Fed’s bonds would gradually ripple through the economy and force up many borrowing rates.

The first signal from the Fed in April that it was considering a move to start reducing its $4.5 trillion portfolio this year had initially jolted investors.

In laying out a possible approach to reducing its bond holdings, the Fed appeared Wednesday to be trying to further prepare financial markets for the impending change. The minutes of this month’s meeting indicated that the Fed may soon release updated details on how the bond reductions will be achieved.

After it met early this month, the Fed left its key policy rate unchanged after having raised it at its December and March meetings. Most economists and investors have said they think the Fed will raise rates twice more this year, with the next one occurring after the next policy meeting ends June 14. Nothing in the material the Fed released Wednesday suggested otherwise.

“Most participants judged that if economic information came in about in line with their expectations,” the minutes said, “it would soon be appropriate for the committee to take another step” to raise rates.

The minutes did not spell out what officials meant by “soon.” But the minutes made clear that Fed officials believe a sharp slowdown in economic growth early this year was likely “transitory” with stronger growth in coming months.