Fed forecasts rate hike ‘soon,’ details plan to trim balance sheet – Washington Post

Most members of the Federal Reserve believe they should raise interest rates “soon” as long as the economy continues to rebound from a surprising bout of weakness in the first quarter, minutes from the Federal Reserve’s May 2-3 meeting showed.

The minutes, which were released Wednesday afternoon, showed some central bankers were still watching for evidence that a recent slowdown in growth is temporary and that inflation is heating up before committing to another interest rate hike. But if economic data comes in as expected, the Fed could raise rates when it meets on June 13-14, a move markets have generally been anticipating.

The minutes also contained details of how the Fed might reduce the massive $4.5 trillion balance sheet it accumulated by purchasing Treasury and mortgage-backed securities during the recession. Central bankers expressed preference for a plan that would let the assets gradually mature but every three months decrease the amount the Fed reinvests in these purchases, leading to a predictable and orderly reduction.

Stocks jumped after the release of the Fed minutes. The Standard & Poor’s 500-stock index closed at a record high, while the Dow Jones industrial average breached 21,000. Since President Trump took office in January, the markets have been on a tear, with investors buoyed by campaign promises to boost infrastructure, cut regulations and simplify the tax code — despite new questions about the Trump campaign’s ties to Russia and the uncertainty over Trump’s health-care and budget plans.

The participants of the Fed’s Open Market Committee, which makes interest rate decisions, reiterated that it was important to gradually raise interest rates to a more normal level after holding them ultralow for years to help stimulate a struggling U.S. economy.

A few participants cautioned that the Fed could raise interest rates more gradually than previous forecasts had suggested, noting that the economy has showed surprising weakness in recent months. But most “judged that if economic information came in about in line with their expectations, it would soon be appropriate for the Committee to take another step in removing some policy accommodation,” the minutes said.

The Fed had forecast raising interest rates three times this year if the economy remained steady. The central bank lifted rates at its meeting in March but then voted unanimously in May to leave its target interest rate unchanged at a range of 0.75 percent to 1 percent.

At the close of the day on Friday, traders saw a 79 percent chance that the central bank would lift rates when it meets in June. Fed Chair Janet L. Yellen will be holding a news conference at that meeting, which would allow her to more clearly explain the decision to the markets.

But some investors had been questioning whether the Fed would hold to that path, given weaker readings on the economy that have emerged from government statistical bureaus.

One focus is inflation, which should gradually accelerate as the economy heats up. The central bank is charged with both restraining excess inflation and ensuring a healthy labor market. Yet the Fed’s favored gauge of inflation, which excludes food and energy, has been running persistently below its target. That may indicate the economy has more room to grow before the central bank needs to raise rates.

“Overall, most participants viewed the recent softer inflation data as primarily reflecting transitory factors, but a few expressed concern that progress toward the Committee’s objective may have slowed,” the minutes of the closed-door meeting read.

While the job market has remained strong, growth in worker wages has been surprisingly sluggish. And government data showed that the U.S. gross domestic product expanded at just 0.7 percent in the first three months of 2017, the slowest pace in three years. The Commerce Department will release a revised estimate for first-quarter growth Friday morning.

The minutes also mentioned a recent slowdown in consumer spending but said that this was likely temporary, due to factors such as an unusually mild winter that reduced energy bills. The Federal Reserve noted several times that the recent slack in growth was likely to be “transitory” and that the economy would probably rebound in coming months.

Meanwhile, other indicators of the economy’s health remain strong. The unemployment rate is already below levels that central bankers expect to be normal in the long run, and businesses have been adding jobs at a steady clip.

The minutes also mentioned that some areas of the country were seeing “shortages of workers in selected occupations,” language that was not included in notes from the March meeting. The government will release its unemployment numbers for May on June 2.

During its March meeting, the Fed laid out a plan to begin gradually reducing its $4.5 trillion balance sheet in late 2017 or early 2018 by simply allowing these assets to run off its balance sheet as they mature and not reinvesting the proceeds in new securities. The Fed currently uses the principal from maturing bonds to buy new ones.

At their meeting this month, central bankers weighed a potential method for reducing this balance sheet. The committee would announce a set of gradually increasing limits on the dollar amounts of securities that would be allowed to run off each month, reinvesting only any amounts that exceeded those caps. The caps would initially be set at low levels and be raised every three months until they hit an unspecified target, the minutes said.

The policy would lead to a gradual, predictable reduction in the Fed’s balance sheet that would be easy to communicate to the public. “Nearly all policymakers expressed a favorable view of this general approach,” the minutes read.

Fed forecasts rate hike ‘soon,’ details plan to trim balance sheet – Washington Post

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