Thursday, 05 December, 2019

Fed Minutes Will Be Parsed for News on Balance Sheet Plans

Mike Powell  Getty Images Mike Powell Getty Images
Christy Curtis | 06 July, 2017, 00:14

USA stocks and bonds were little changed Wednesday following the release of minutes from the Federal Reserve's June meeting that showed officials readying plans to start gradually shrinking the Fed's balance sheet in coming months.

Members "expressed a range of views" about the right timing of such cuts, with several preferring to "announce a start to the process within a couple of months", the minutes said.

While he was the only member of the Federal Open Market Committee to dissent, the minutes noted that "a few" Fed officials who supported the rate increase cautioned that the weakness of inflation might require the Fed to raise rates more slowly going forward.

Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, cited his concern about weak inflation as a reason that he voted against a rate increase at the June meeting.

"Inflation on a 12-month basis had declined recently and was running somewhat below 2 percent". Analysts are watching for another increase in the federal funds rate in September, followed by another hike at the December meeting. The Fed's favored inflation measure, the core personal consumption expenditure index, grew just 1.4 percent at an annualized rate in May, below the rate that the Fed targets.

The slow start to the year has led some economists to caution against additional interest rate hikes this year.

The strengthening job market left a lot of them comfortable with raising a key short-term rate last month. Some Fed officials suggested at the June meeting that this reflects both the possibility of slower economic growth and the influence of the Fed's own bond holdings.

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Other officials believed that making a decision later in the year would give the Fed more time to evaluate the outlook for economic activity and inflation.

US stock prices were up slightly at the close of trade while yields on USA government debt dipped.

Because of the markets' performance and subdued volatility, a few Fed officials expressed concern about "a buildup of risks to financial stability". The increase of 0.25 percentage point raised the rate to between 1% and 1.25%.

The issue of when to begin reducing the Fed's $4.2 trillion portfolio of Treasury bonds and mortgage-backed securities and how it might affect deciding future rate rises also sparked debate.

The Fed's next meeting is July 25-26. Investors saw a almost 20 percent chance of another rate hike in September, and a 60 percent chance of another rate hike or two by December.

Yellen said last month that asset valuations look "somewhat rich" using traditional metrics like price-earnings ratios.

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