Date
16 July 2019
Minutes from the Fed’s January meeting suggest that the US central bank has not ended its three-year campaign to raise interest rates, but merely put it on an extended pause. Photo: Reuters
Minutes from the Fed’s January meeting suggest that the US central bank has not ended its three-year campaign to raise interest rates, but merely put it on an extended pause. Photo: Reuters

Fed signals end to balance sheet unwind

The US Federal Reserve on Wednesday signaled it will soon lay out a plan to stop letting go of US$4 trillion in bonds and other assets, but policymakers are still debating how long their newly adopted “patient” stance on US rates policy will last, Reuters reports.

For now, policymakers see little risk to leaving interest rates alone while they take time to assess rising risks, including a global slowdown, the report said, citing minutes from the Fed’s Jan. 29-30 meeting.

Though “several” participants thought a rate increase would be necessary only if inflation unexpectedly surged, “several other participants indicated that, if the economy evolved as they expected, they would view it as appropriate to raise the target range for the federal funds rate later this year.”

Those split views suggest that the central bank may not yet have ended its three-year campaign to raise interest rates, but has merely put it on an extended pause, Reuters noted.

In January the Fed surprised markets by saying it would be patient about adjusting its target range for short-term interest rates, now between 2.25 percent and 2.5 percent.

The surprisingly dovish decision came amid mounting risks to the US economy, including slowing Chinese and European economies and waning stimulus from the 2018 US tax cuts.

Several Fed policymakers speaking since the Fed’s January pledge of patience have insisted the economy is in a good place.

Meanwhile, Fed policymakers do seem to have coalesced around a plan to leave their balance sheet permanently bigger than it ever was in the past, the minutes released on Wednesday show.

“Almost all participants thought that it would be desirable to announce before too long a plan to stop reducing the Federal Reserve’s asset holdings later this year,” the minutes said.

Research staff presented options at the meeting for “substantially slowing” the runoff of the Fed’s balance sheet, “at some point over the latter half of this year.”

The runoff is currently capped at US$50 billion a month.

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RC

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