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Fed minutes reveal debate over inflation and Trump

09 April, 2017, 02:47 | Author: Paula Vaughn

The Federal Reserve is trying to send a message to bond traders: prepare for a reduction in its $US4.5 trillion balance sheet.

The minutes indicated that this change could be announced later this year, "which is perhaps a little sooner than most in the markets were anticipating", according to an analysis by Paul Ashworth, chief USA economist at Capital Economics. Think of it as a plumber trying to make sure that the water initially flows through the taps but now he must juggle the pressure of the water with the temperature as well; a torrent of scalding water is a risky as a dribble of cold economically speaking.

Minutes from the meeting among the Federal Open Market Committee also revealed that the central bank is also entering a negative zone when it comes to their outlook on the United States economy improving drastically based on Trump's current policies and plans. That's happened, with two rate hikes since Election Day versus the prior pace of two hikes over ten years.

Instead of continuing to reinvest all of the principal from maturing bonds, which keeps the balance sheet steady, the Fed would gradually let its portfolio run off, assuming the economy continues as expected.

"Many participants emphasized that reducing the size of the balance sheet should be conducted in a passive and predictable manner", the minutes said.

'Markets had been embracing the prospect of further Fed rate hikes this year, assuming these would be accompanied - even driven - by Trump stimulus policy driving stateside economic growth, ' said Mike van Dulken, head of research at Accendo Markets. In fact, some members of the FOMC said in the minutes that the Fed had nearly hit its 2% inflation target.

On the other hand, Boston Federal Reserve President Eric Rosengren announced that he will support four more increases. The minutes showed that several Fed officials thought Trump's stimulus plans wouldn't likely begin before next year.

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The statement comes at a time when the uncertainty of Trump's ability to follow through on his economic promises is growing.

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. He didn't say what that more normal level might be. Unemployment, presently at a low of 4.7 percent, is directly tied to inflation forecasts.

The minutes released on Wednesday of the March 14-15 policy discussion, at which the Fed voted 9-1 to raise interest rates, also showed that the rate-setting committee had a broad discussion about whether to phase out or halt reinvestments all at once.

The S&P 500 SPX, +0.19% on Thursday closed at 2,357.49, only about 2% below its all-time high set in March.

The central bank amassed its Treasuries and MBS during three rounds of large-scale purchases known as quantitative easing, which was aimed to lower long-term borrowing costs and combat the repercussions of a severe recession that was exacerbated by the global credit crisis more than eight years ago.

"If anything, modifying the balance sheet reduces the need for higher rates".


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