Published: Sun, May 28, 2017
Economy | By Melissa Porter

Fed minutes: Officials back reducing bond holdings this year

Fed minutes: Officials back reducing bond holdings this year

This plan leaves Fed members with more room to raise near-term rates, as they nearly certainly will do at their June meeting. "Gold is largely unchanged after an initial burst higher failed as May's Fed minutes offered little to suggest that the Committee was seriously reconsidering a widely anticipated June rate hike", Tai Wong, director of base and precious metals trading for BMO Capital Markets in NY, told Reuters. Most economists and investors have said they think the Fed will raise rates twice more this year, with the next one occurring after the next policy meeting ends June 14.

The FOMC mins were the latest indication of the Fed's caution over policy tightening since the central bank began lifting rates from near Zero in December 2015. The Fed sees to raise rates once again is "soon be appropriate".

On the economic front, in the week ending May 20, the advance figure for seasonally adjusted initial claims was 234,000, an increase of 1,000 from the previous revised level, said the U.S. Labor Department Thursday.

"Our money is on the unemployment rate as being the key variable driving policy forward", said Chris Rupkey, senior analyst at Bank of Tokyo-Mitsubishi. 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 account of the Federal Reserve's early May meeting, which the Fed published Wednesday, suggested the decision to raise interest rates in June still hangs in the balance.

The minutes did not spell out what officials meant by "soon".

USA central bank policymakers want to see proof the country's economic slowdown is temporary before they raise interest rates, according to minutes of their latest meeting.

"The Fed's plan to proceed very, very, cautiously with the balance sheet that the risk of an adverse reaction in the bond market should be smaller", Paul Ashworth, the head US economist at Capital Economics, said in a note.

Fed officials said planned spending by President Donald Trump's administration could boost the economy more than now forecast, although the details and timing of the projects "remain highly uncertain".

"As the caps increased, reinvestments would decline, and the monthly reductions in the Federal Reserve's securities holdings would become larger".

The discussion of winding down the Fed's balance sheet was also framed in the minutes in terms of the wider group of policymakers.

The amount of assets soared from about $925 billion before the 2008 financial crisis hit as the the Fed then started to buy securities to try to stimulate the economy. Until now, the Fed has been taking the proceeds it receives from maturing debt and re-investing them in more bonds.

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