Fed sees October end for monthly bond-buying programme
United States Federal Reserve officials are in broad agreement that they will likely announce an end to their monthly bond-buying programme in October, bringing to a close the third round of massive bond purchases the central bank has relied upon to boost economic growth following the Great Recession.
Minutes of the Fed's June 17-18 meeting released on Wednesday showed officials were in basic agreement that the if the economy continues to improve, the final reduction in bond purchases would total a cut of US$15 billion and would be announced at the Fed's October 28-29 meeting.
With that final reduction, the Fed's balance sheet will be close to US$4.5 trillion, more than four times the amount of the balance sheet when the financial crisis struck in the fall of 2008.
The Fed has purchased Treasury bonds and mortgage-backed securities as a way to lower long-term interest rates to give the economy a boost.
Fed officials have said they will not immediately start selling off the holdings, a move that could send interest rates rising. But, instead, will reduce the holdings only gradually.
The minutes showed that the Fed had a lengthy discussion on just how it planned to accomplish that reduction in its balance sheet, but no final decisions were made. But the minutes said officials believed it will be important to have a "simple and clear approach" that could be communicated to financial markets and the public.
It said the Fed expected to release a plan later this year "well before the first steps" were taken to start reducing the bond holdings. The Fed's move to begin selling off its holdings could have a significant impact on interest rates.
The minutes showed there was a continuation of a debate central bank officials have been having over how to signal the first move to start raising its benchmark short-term interest rate, which has been at a record low near zero since December 2008.
This discussion featured a range of views split between Fed officials who believed the central bank should communicate its continued concerns that inflation is too low and, therefore, rates needed to stay low, and those who were worried that the economy might rebound in the second half of this year at a faster pace than expected and faster moves to raise rates could be warranted.
In the end, the Fed statement stuck to the current guidance that rates will likely remain low for a "considerable time" after the bond purchases end.
Wall Street had little reaction to the minutes with stocks extending gains in the absence of any strong signal from the Fed that its first hike in short-term rates could come sooner than investors now expect. The Dow Jones industrial average rose to 16,985.61 points Wednesday.
The minutes showed that Fed officials discounted the big drop in economic growth in the first three months as a slump that reflected temporary factors. They continued to express optimism that the economy will rebound to healthy growth rates for the rest of this year.
"Fed officials were not overly worried by either the decline in first-quarter GDP or the evidence of a pickup in inflation," said Paul Ashworth, chief US economist at Capital Economics.
The minutes did reveal that several Fed officials saw developments in Iraq and Ukraine "as posing possible downside risks to global economic activity or potential upside risks to world oil prices".
At its June meeting, the Fed kept policy essentially unchanged, holding its key short-term interest rate at a record low near zero, where it has been since December 2008. It also made a fifth US$10-billion reduction in its monthly bond purchases, bringing them down to US$35 billion a month.
Before the reductions began in December, the purchases, aimed at keeping long-term interest rates low, stood at US$85 billion per month.
The minutes showed that Fed officials discussed a question they have been getting about whether the last reduction in purchases might total US$15 billion or US$5-billion. According to the minutes, the participants said it would be appropriate to reduce the bond purchases by US$15 billion in the last move, which would occur at the October meeting, rather than hold off and make a final US$5-billion reduction in December.
US$10-billion cut expected
This discussion indicated that the Fed expects to announce another US$10-billion cut at the next meeting on July 29-30 and follow that with a further US$10-billion cut at the September meeting and then the last reduction of US$15 billion at the October meeting.
But Fed officials stressed that that action did not signal an earlier move to start boosting its short-term rates.
Most private economists believe the Fed's first rate hike will not occur until next summer, although some believe the move could occur a few months sooner if the labour market continues to show healthy gains in employment.
The government reported last week that the unemployment rate fell to 6.1 per cent in June, the lowest level since September 2008, the month the financial crisis hit with force, while 288,000 jobs were created, the fifth straight monthly gain above 200,000.
The minutes were released on Wednesday with the customary three-week delay since the last meeting.