Fed signals shift in balance sheet policy this year

WASHINGTON: Federal Reserve officials have signalled they may shift away from a post-financial crisis investment policy that built a US$4.5 trillion portfolio to help boost economic growth, minutes from their latest meeting showed.

At their March policy meeting, central bankers also said they continued to see “considerable uncertainty” about the effects of possible fiscal stimulus from the Trump administration.

Word of the planned shift on balance sheet policy helped send Wall Street lower, with the major stock indices erasing gains made earlier in the day.

The minutes recorded the views of policymakers expressed at a March 14-15 meeting, when they voted to raise the target range for their benchmark interest rates to 0.75-1.00 per cent in order to head off mounting inflation.

With continued economic growth and gradual rate hikes, most meeting participants believed a shift in balance sheet policy “would likely be appropriate later this year,” the minutes said.

But policymakers were split on how quickly to slow or phase out reinvestments in Treasury bills and mortgage-backed securities.

The Fed undertook its massive asset purchasing program during the global financial crisis as a means of holding down interest rates and spurring growth. Finally reversing this policy itself could have the effect of an interest rate hike, accounting for Wall Street’s dimmed exuberance.

The minutes also showed some disagreement among central bankers over the near- term dangers of inflation, a subject that had divided Fed members in mid-2016.

The most recent projections from the Federal Open Market Committee, which sets the Fed’s benchmark rates, were for a total of three rate hikes in 2017.

“Participants continued to underscore the considerable uncertainty about the timing and nature of potential changes to fiscal policy,” the minutes said.

President Donald Trump arrived in the White House with an agenda pledging corporate tax cuts, infrastructure spending and slashed regulation, but such policies have yet to take shape.

Parts of his agenda, such as health care – which has considerable consequences for taxation – have stalled amid divisions in the majority Republican Party.

“Several participants now anticipated that meaningful fiscal stimulus would likely not begin until 2018,” the minutes said.

While FOMC members expected gradual economic growth, the minutes also show some disagreement over the near-term dangers of inflation.

The Fed’s preferred inflation measure, the Personal Consumption Expenditures price index, has moved steadily towards the Fed’s two per cent target, adding to pressure on the central bank to raise rates.

But policymakers last month were divided as to how soon the world’s largest economy is likely to hit two per cent “on a sustained basis,” according to the minutes.

Some at the March meeting pointed out that ‘core’ inflation, excluding volatile food and fuel prices, appeared tame and could take time before settling at or above the target level.

Others felt the Fed had largely met its inflation objective and that “a faster pace of scaling back accommodation” could be warranted.

Ian Shepherdson of Pantheon Macroeconomics said the minutes showed policymakers still could not agree on how much slack remained in labour markets.

“Fed officials remain split on the question of how much inflation pressure is now in the system... but it has become hard for doves to argue that the economy is still some way from full employment,” he wrote.

“No firm decisions have yet been made but it seems pretty clear now that reinvestment will be slowed.”

Economic conditions in China and Europe, which had caused the Fed to forego rate increases in early 2016, appeared to have stabilized, according to the minutes.

“At the same time, several participants cautioned that upcoming elections in EU countries posed both near-term and longerterm risks,” the minutes said. — AFP