Fed officials back reducing bond holdings this year

WASHINGTON, May 25, 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 midJune.

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 also 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.