Federal Reserve officials have indicated there is a strong chance they will announce in September a decision to start shrinking the central bank’s portfolio of bonds and other assets, while putting off until December any further interest-rate increase, the Wall Street Journal reports.
The moves would give officials time to assess how markets react to the balance-sheet reductions and to confirm their view that a recent slowdown in inflation will fade.
Launching the balance-sheet plan in September also would afford chairwoman Janet Yellen an opportunity to initiate it well ahead of any potential leadership transition. Her term as chair expires in February, and President Donald Trump hasn’t indicated whether he would nominate her to a second term or replace her.
While a final decision on the next Fed moves hasn’t been made, officials will have several opportunities in coming weeks to clarify their thinking. The central bank releases minutes of the June meeting on Wednesday, and Yellen testifies before Congress next week. Officials will also gather in Jackson Hole, Wyoming, at the end of August for an annual monetary-policy conference that will provide ample opportunities for them to offer further guidance.
Earlier this year, some officials indicated they were considering raising interest rates in March, June and September and then starting the portfolio reduction plan in December. They did raise rates in March and June, but are considering the new strategy for several reasons.
First, they agreed at their June policy meeting on how they would reduce the US$4.5 trillion portfolio, and made that plan public. Some officials now think they might as well get started soon, given the US economic expansion appears steady and global growth is improving.
Second, if Yellen isn’t nominated to a second term as chair, they would prefer not to wait until December and launch the plan shortly before her successor takes charge.
Third, inflation remains a puzzle for the Fed. The unemployment rate fell to 4.3 percent in May, a 16-year low, yet price pressures have diminished in recent months, moving year-over-year inflation gauges further below the central bank’s 2 percent target.
Some Fed officials in recent weeks have said they want to see more proof that such price softness is transitory before resuming rate increases, but haven’t signaled similar qualms about initiating the balance-sheet runoff.
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