Fed signals shift in balance sheet policy 'this year'

Fed signals shift in balance sheet policy 'this year'

Bond strategists expected the minutes from the Federal Reserve's March meeting, released Wednesday at 2 p.m. ET, to include some discussion of balance sheet reduction.

The Fed, chaired by Janet Yellen, bought Treasury and mortgage-backed bonds on a hitherto unprecedented scale in the wake of the financial crisis to help to keep interest rates low and to encourage job creation and economic growth.

The minutes said that Fed officials agreed that if the economy continued to perform as expected that "a change in the committee's reinvestment policy would likely be appropriate later this year".

Trump has promised to return the USA to sustained 4% annual GDP growth (which he recently downgraded to a 3% target), slash taxes significantly, invest $1 trillion in infrastructure, expand job opportunities, and more.

On inflation, the minutes showed that some Fed officials anxious that if unemployment, now at a low of 4.7 percent, fell even further, it could pose a "significant upside risk" of higher inflation. But there was less agreement over the issues of inflation and Trump's economic plans.

"Participants continued to underscore the considerable uncertainty about the timing and nature of potential changes to fiscal policy", the minutes said.

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With improving economic conditions, the Fed increased interest rates by 25 basis points on March 15. Members of the Federal Open Market Committee also said meaningful fiscal stimulus from the Trump administration would not be felt until 2018.

The release of the minutes came a day after the sudden resignation of FOMC member Jeffrey Lacker - the president of the Richmond Federal Reserve Bank - who admitted to a role in the leak of confidential minutes meetings in 2012.

The minutes showed that the Fed is increasingly encouraged by progress in the global economy, including stronger growth in China and Europe. Many analysts believe the Fed will hold rates steady at the May meeting.

While some Fed officials argued that the inflation target might be achieved by the end of this year, other Fed officials argued that since inflation had run below 2 percent for so long, it would do no harm to allow prices to rise above 2 percent for a time.

The minutes make it clear that shrinking the $4.5 trillion balance sheet will be a priority in the coming years, but probably would start very gradually and not until late this year at the soonest.

The development may raise the temperature for the Fed, observers said, with hostile lawmakers in Washington threatening to audit the central bank or take measures some critics say could curtail its independence.

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