Fed split on signals for first interest-rate increase
Washington (July 9) Federal Reserve officials are in broad agreement that they will likely announce an end to their monthly bond buying program in October, bringing to a close the third round of massive bond purchases the central bank has relied upon to boost economic growth following the Great Recession.
Minutes of the Fed’s June 17-18 meeting released Wednesday showed officials were in basic agreement that the if the economy continues to improve, the final reduction in bond purchases would total a cut of $15 billion and would be announced at the Fed’s Oct. 28-29 meeting.
Fed officials had differing views on the best way to signal to financial markets when they might raise a key short-term interest rate. They were in broad agreement, however, that their monthly bond buying program will end in October.
With that final reduction, the Fed’s balance sheet will be close to $4.5 trillion, more than four times the amount of the balance sheet when the financial crisis struck in the fall of 2008. The Fed has purchased Treasury bonds and mortgage-backed securities as a way to lower long-term interest rates to give the economy a boost.
Fed officials have said they will not immediately start selling off the holdings, a move that could send interest rates rising. But instead will reduce the holdings only gradually.
The minutes showed that the Fed had a lengthy discussion on just how it planned to accomplish that reduction in its balance sheet but no final decisions were made. But the minutes said officials believed it will be important to have a "simple and clear approach" that could be communicated to financial markets and the public.
It said the Fed expected to release a plan later this year "well before the first steps" were taken to start reducing the bond holdings. The Fed’s move to begin selling off its holdings could have a significant impact on interest rates.
The minutes showed there was a continuation of a debate central bank officials have been having over how to signal the first move to start raising its benchmark short-term interest rate, which has been at a record low near zero since December 2008.
This discussion featured a range of views split between Fed officials who believed the central bank should communicate its continued concerns that inflation is too low and therefore rates needed to stay low and those who were worried that the economy might rebound in the second half of this year at a faster pace than expected and faster moves to raise rates could be warranted.
In the end, the Fed statement stuck to the current guidance that rates will likely remain low for a "considerable time" after the bond purchases end.
Wall Street had little reaction to the minutes with stocks extending gains in the absence of any strong signal from the Fed that its first hike in short-term rates could come sooner than investors now expect.