Date
12 December 2017
The US Federal Reserve is debating the timing of an exit from its stimulus program with an eye on managing a rise in interest rates. Photo: Bloomberg
The US Federal Reserve is debating the timing of an exit from its stimulus program with an eye on managing a rise in interest rates. Photo: Bloomberg

End to Fed stimulus just a matter of time

The United States central bank is preparing to exit its easy money policy and a decision is only a  matter of time.

This emerged after revelations about an April meeting by the Federal Reserve Open Market Committee in which officials debated how long the Fed will wait before it starts to reduce the size of its balance sheet, the Financial Times reported Wednesday. 

The minutes show increased efforts to manage a rise in interest rates given a balance sheet bloated to more than US$4 trillion by repeated rounds of asset purchases in the past five years.

On Tuesday, New York Fed president William Dudley called for a change in exit strategy, saying the central bank should keep its balance sheet steady until after it has first raised interest rates, a move expected in mid-2015.

Once the Fed stops reinvesting, its balance sheet will start to gradually shrink, reducing the amount of stimulus it adds to the economy.

The minutes imply the Fed could provide a forecast date, a forecast of the size of the balance sheet or a set of economic conditions that would trigger a halt to reinvestments, the report said.

Some Fed officials also want more information released about the FOMC’s forecast of rates below normal for a period even after unemployment and inflation get back to normal.

That language was added to the FOMC statement in March as one of chairwoman Janet Yellen’s first key policy initiatives.

In the April meeting, the Fed focused on ways to get monetary policy back to normal when banks have trillions of dollars of excess reserves. That means the Fed cannot use its traditional method of draining a small amount of reserves in order to force up interest rates.

Instead, the FOMC talked about new tools such as reverse repos, term reverse repos and term deposits. All are new ways for the Fed to tie up surplus liquidity in the financial system and thus tighten its control over interest rates.

However, it made no decision except to keep testing the new tools, the report said.

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