Global

Fed minutes: 'Several' see balance-sheet reduction starting in a 'couple of months'

Fed minutes: 'Several' see balance-sheet reduction starting in a 'couple of months'

US 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. But some participants said they were "less comfortable" with the pace of tightening. Meanwhile, U.S. officials will soon confront the challenge of raising the debt ceiling to continue to fund the government.

Some Fed officials are anxious that investors are not responding to the recent rate increases.

According to the minutes, most policymakers stated that the recent softness of inflation readings had little bearing on underlying inflation trends.

The market consensus is toward a start in September, which would likely push another interest rate hike to the end of the year despite the Fed's optimism that stubbornly weak inflation will pick up.

The main theme is that officials are divided on inflation, rates and when to trim the balance sheet.

The minutes recorded policymakers' deliberations at last month's meeting, when the central bank raised interest rates by a quarter of a point to a range of one-to-1.25%.

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

Investors also see the next rate increase occurring in December, according to Fed funds futures data compiled by the CME Group. The minutes said some participants see evidence that investors are taking larger risks and a few are concerned about "a buildup of risks to financial stability".

As of Wednesday afternoon, markets were projecting a 97 percent chance that the Fed would remain on hold when it meets again in July.

In their forecasts, Fed officials have signaled another small rate increase is coming this year, and three more are expected in 2018 until the rate reaches about 2.1%.

Financial analysts say the Fed's decision to begin reducing its holdings of Treasurys and other assets later this year could begin to curtail the boom in equities.

The plan, approved in June, involves the Fed slowly reducing its holdings by gradually allowing an increasing amount of proceeds from maturing securities to be run off the books each month.

After the June meeting, Yellen said the plan would lead to "a gradual and largely predictable decline" in the assets. The Committee expected to begin implementing a balance sheet normalization program in 2017, provided that the economy evolves broadly as anticipated.

Some Fed officials want to announce the beginning of the process "within a couple of months", according to minutes of the US central bank's June meeting.


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