Despite keeping their stand firm regarding two more interest rate hikes, officials from the Federal Reserve did note and emphasize a weakness in the US economy’s current growth rate based on “hard” economic data and on actual performance relative to soft data.
Later on Friday, the US nonfarm payrolls report is expected to show an increase of 180,000 jobs in March, compared with 235,000 in February, according to economists polled by Reuters, which could reinforce expectations that the Federal Reserve will deliver two more interest rate increases this calendar year.
But the Fed’s asset holdings will not return to pre-crisis levels. If the Fed stops recycling proceeds from the sale of matured bonds, upward pressure on long-term interest rates will intensify, weighing on housing investment and capital spending.
“Many participants emphasized that reducing the size of the balance sheet should be conducted in a passive and predictable manner”, the minutes, from its policy meeting last month, said.
John Williams, president of the San Francisco Federal Reserve Bank, said this process would take several years and run in parallel, albeit for longer, to increases in the Fed’s interest rates.
The Fed piled up more than $4 trillion in financial assets on its balance sheet as a result of the global financial crisis and subsequent Great Recession.
No decision was made about the timing or the details of any move to reduce the Fed’s holdings.
The minutes showed that Fed officials grappled during their discussions with two big uncertainties facing the US economy: Whether it would be safe to let inflation rise faster for a while and how to assess the effects of President Donald Trump’s ambitious economic stimulus plans.
On the other hand, Boston Federal Reserve President Eric Rosengren announced that he will support four more increases.
The minutes revealed that Fed officials discussed in depth how to best deal with the balance sheet, including whether to phase out reinvestment of principal payments or halt them all at once.
“It has come as a minor shock” that the Fed wants to start the reduction in 2017, which appears to have been earlier than the market had been expecting, said Richard Perry, market analyst at Hantec Markets, in a note.
Regarding Trump’s current plan of repealing the Affordable Care Act, Fed Chair Janet Yellen has personally noted on the matter including the more restrictive immigration policies.
The expectation of tax cuts and deregulation has sent stock prices rising since Trump’s November election victory. “Some participants viewed equity prices as quite high relative to standard valuation measures”, according to the minutes. Unemployment, presently at a low of 4.7%, is directly tied to inflation forecasts. The Fed’s dual mandates are to achieve maximum employment and moderate inflation.
Some Fed officials thought the inflation target might be achieved by year’s end. It climbed 12.28 points, or 0.9%, to 1,364.43. The Fed continued to signal that it expects to raise rates a total of three times this year.
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