2017-04-05 17:07:02
Fed Is Expected to Pare Investment Holdings, Officials Signal

WASHINGTON — Most Federal Reserve officials expect the Fed to begin reducing its huge investment holdings later this year, an important step toward ending the Fed’s post-2008 economic stimulus campaign.

Officials discussed the change at the Fed’s most recent meeting in March, according to an official account that the Fed published on Wednesday. No decision was reached about the timing or the details of the move. However, if the economy continues to grow, most officials “judged that a change to the committee’s reinvestment policy would likely be appropriate later this year.”

Federal Reserve officials are increasingly confident that the day is drawing closer when the American economy will be able to grow without the Fed’s support, minutes of the central bank’s most recent meeting reveal.

Officials voted at the March meeting to raise the Fed’s benchmark interest rate for the third time since the financial crisis, to a range between 0.75 percent and 1 percent. Since the meeting, Fed officials have said that the Fed is on course to increase rates by at least an additional half a percentage point this year.

Although the markets have already factored in three rate increases this year, the release of the minutes were being watched by investors for signals on how aggressively the central bank would be in letting the economy run its course.

The meeting account emphasized that the Fed’s economic outlook has not improved in recent months. Fed officials see no evidence of a change in the nation’s economic trajectory since the election of President Trump. But growth has remained strong enough to continue rate increases.

The Fed has said that its economic forecasts do not incorporate the potential impact of policy changes proposed by Mr. Trump or Congress. The central bank has adopted a wait-and-see posture. The account said most officials do not expect any substantial changes before 2018.

“Members continued to judge that there was significant uncertainty about the effects of possible changes in fiscal and other government policies,” the account said, “but that near-term risks to the economic outlook appeared roughly balanced.”

The Fed accumulated more than $4 trillion in Treasuries and mortgage securities in a series of campaigns after the 2008 financial crisis as part of its effort to put downward pressure on borrowing costs. It has maintained the size of those holdings by reinvesting the proceeds from maturing securities.

The Fed can reduce its portfolio by doing nothing: As securities mature, it can simply refrain from investing in replacement securities.

Accumulating the bonds forced other investors to compete for the remaining stock by accepting lower interest rates from borrowers. That amplifies the effect of the Fed’s primary tool, its direct suppression of short-term rates. Shrinking the portfolio would gradually reduce the force of that effect.

Fed officials decided several years ago to start raising short-term rates before allowing the bond holdings to dwindle, but they have never said when the second step in the process would begin. That remains an open question, according to the account. It said Fed officials discussed both the timing and the mechanics, including whether to end reinvestment completely or phase it out, and whether to deal with Treasuries and mortgage bonds at the same time or on separate timetables. The account said officials would resume the discussion at the Fed’s next meeting, on May 2 and 3, in Washington.

The Fed is raising rates because economic conditions are drawing closer to good health. The account said “nearly all participants” have concluded that the American economy is “at or near maximum employment.” The Fed regards some unemployment as consistent with the normal churn of hiring and firing.

Inflation, sluggish since the crisis, has also perked up a little, although on this count, the Fed is not yet satisfied. “Nearly all members judged that the committee has not yet achieved its objective for headline inflation on a sustained basis,” the account said. The Fed’s goal is 2 percent annual inflation.

The Fed predicted a continued improvement in economic conditions at the beginning of the year, and reiterated that it expected to raise rates three times in 2017.

Some Fed officials have said — in the weeks since the meeting — that it might be necessary to move more quickly. Eric Rosengren, president of the Federal Reserve Bank of Boston, said in a speech last week that he expected the Fed to raise rates four times this year.

“The perception seems to be that the outcome of each FOMC meeting depends on nuances of incoming data, with the base case being no change in rates,” Mr. Rosengren said, referring to the Fed’s policy arm, the Federal Open Market Committee. “My own view is that an increase at every other FOMC meeting over the course of this year could and should be the committee’s default.”

On the other side, only one Fed official worried at the March meeting that the Fed was moving too fast. Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, voted against raising interest rates. He argued it was not clear how much slack remained in the labor market, and inflation remained weak.