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Fed Minutes Will Be Parsed for News on Balance Sheet Plans

06 July, 2017, 00:24 | Author: Paula Vaughn
  • Mike Powell  Getty Images

Fed Chair Janet Yellen indicated following the June meeting that the Fed would start gradually "normalizing" its $4.5 trillion balance sheet later this year. Others pushed for more time to first see how the broader US economy fares during the second half of 2017.

Fed officials updated their balance-sheet policy in the gathering, laying out a path of gradual reductions with caps.

Investors were watching the minutes for further clues as to when the Federal Reserve might begin to unwind its massive balance sheet.

The increase was the Fed's second of the year and was taken as a vote of confidence in the US economic recovery and future pace of growth.

For agency and mortgage-backed securities debt, the cap starts at $4 billion, and rises by $4 billion every three months until it hits a $20 billion a month.

William Dudley, the president of the Federal Reserve Bank of NY, has suggested the Fed might need to raise rates more quickly in order to achieve its goals. The minutes show a Fed divided between officials comfortable with the unemployment rate undershooting their estimates about the sustainable level and those who fret that "a substantial and sustained unemployment undershooting" could trigger inflation or financial instability.

Trump is trying to replace the Obamacare, Still in Progress
He said, "It's not easy making America great again, is it?" and not, "It's not easy making American great again". Negotiations are continuing as planned for a proposal that repeals and replaces Obamacare simultaneously.

In terms of rates, the Fed funds futures market was pricing in a 55% chance of a hike before the FOMC minutes and pricing in a 56% chance now.

Washington political gridlock is also starting to creep into the outlook of the Fed's business contacts, the minutes showed. It noted that some large companies are curtailing spending "in part because of uncertainty about changes in fiscal and other government policies".

Yellen begins her semi-annual testimony to Congress on July 12 before the House Financial Services Committee.

Several Fed officials expect the Fed to keep raising the rate "in coming years", saying that would help stabilize inflation at 2 percent. This assessment would take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and worldwide developments. They added those trends weren't likely to persist in the medium term. The Fed foresees one additional rate hike this year without specifying when that could occur.

The Fed's preferred measure of underlying inflation slipped again in May to 1.4 percent, the Commerce Department reported on Friday, and has run below target for more than five years.

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