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2017-07-05 16:55:03
Fed Officials Split Over Timing on Reducing Debt Holdings

WASHINGTON — The Federal Reserve stayed on schedule with interest rate increases during the first half of 2017, but its plans for the second half of the year are less clear, according to an account of the Fed’s June meeting.

The minutes released Wednesday revealed that officials are still debating how soon the Fed should begin to reduce its securities portfolio.

The Fed raised its benchmark interest rate for the third consecutive quarter at the June meeting. It also published a plan for paring its massive holdings of Treasuries and mortgage-backed securities, which it accumulated after the financial crisis to reduce borrowing costs for businesses and consumers.

The Fed has said it wants to launch the balance sheet plan this year, but officials are divided between starting in September and waiting until December. The minutes of the June meeting said several officials wanted to start “within a couple of months,” while others favored waiting. The Fed published the meeting account Wednesday after a standard three-week delay.

Officials also disagreed about the likely impact, with some arguing balance sheet reductions were effectively a substitute for rate increases, while others predicted only a modest economic impact.

The differences are narrow because Fed officials remain confident in the strength of the economy. Janet L. Yellen, the Fed’s chairwoman, and other Fed officials have made clear they are committed to steadily reducing the Fed’s support for economic growth after years of hesitation. By the end of this year, Ms. Yellen has said, the Fed may raise rates to a level that neither encourages nor discourages growth.

But the emergence of those differences reflects concerns about a number of simmering issues.

Some Fed officials are worried that investors are not responding to the recent rate increases. As the Fed raises rates, lenders have lowered borrowing costs, the opposite of the effect intended by the central bank. The minutes said some participants see evidence that investors are taking larger risks and a few are concerned about “a buildup of risks to financial stability.”

William Dudley, the president of the Federal Reserve Bank of New York, has suggested the Fed might need to raise rates more quickly in order to achieve its goals. But Ms. Yellen downplayed the extent of the Fed’s concerns at a news conference after the Fed’s June meeting.

“We’re not targeting financial conditions,” Ms. Yellen said. “We’re trying to generate paths for employment and inflation that meet our mandated objectives.”

Inflation is another issue that remains on the back burner for now. The pace of price increases has slowed in recent months, forcing the Fed to back away from its earlier predictions that this would be the year that inflation approaches the Fed’s desired 2 percent annual pace.

The minutes acknowledged what it described as “surprisingly low recent readings” on inflation, but it said that most officials continued to expect a return to normal.

One reason for this optimism is that Fed officials attribute the recent sluggishness to lower prices on a few kinds of products, including wireless telephone services and prescription drugs. The minutes noted, however, that “several participants expressed concern that progress toward the committee’s 2 percent longer-run inflation objective might have slowed and that the recent softness in inflation might persist.”

Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, cited his concern about weak inflation as a reason that he voted against a rate increase at the June meeting. The minutes said Mr. Kashkari “preferred to await additional evidence that the recent decline in inflation was temporary.”

While he was the only member of the Federal Open Market Committee to dissent, the minutes noted that “a few” Fed officials who supported the rate increase cautioned that the weakness of inflation might require the Fed to raise rates more slowly going forward.

The minutes also revealed that the boost in business confidence that followed President Trump’s election is abating because some executives see less chance of significant fiscal policy changes that might stimulate economic growth. It noted that some large companies are curtailing spending “in part because of uncertainty about changes in fiscal and other government policies.”