US Fed debates plans to exit easy monetary policy 

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The US Federal Reserve is debating yet another addition to its forward guidance as the central bank starts to plan an exit from easy monetary policy.

According to the minutes of April’s meeting of the Federal Open Market Committee, “a number” of officials wanted to give more information about how long the Fed will wait before it starts to reduce the size of its balance sheet.

The minutes show how the Fed is starting to wrestle with the complexity of raising interest rates with a balance sheet bloated to more than $4tn by repeated rounds of asset purchases over the past five years.
They follow New York Fed president William Dudley’s call on Tuesday for a change in exit strategy. Mr Dudley said the Fed should keep its balance sheet steady until after it has first raised interest rates, a move currently expected in mid-2015.

“A number of participants suggested that it would be useful to provide additional information regarding how long the Committee would continue its policy of rolling over maturing Treasury securities at auction and reinvesting principal payments on all agency debt and agency mortgage-backed securities,” say the minutes.

Once the Fed stops reinvesting, its balance sheet will start to gradually shrink, reducing the amount of stimulus it adds to the economy. The minutes imply the Fed could provide a forecast date, a forecast of the size of the balance sheet or a set of economic conditions that would trigger a halt to reinvestments.

Some Fed officials also called for giving more information about the FOMC’s forecast of rates below normal for a period even after unemployment and inflation get back to normal. That language was added to the FOMC statement in March as one of new chairwoman Janet Yellen’s first big policy initiatives.

The main event of April’s meeting was a discussion about the Fed’s tactics for getting monetary policy back to normal when banks have trillions of dollars of excess reserves. That means the Fed cannot use its traditional tactic of draining a small amount of reserves in order to force up interest rates.

Instead, the FOMC talked about new tools such as reverse repos, term reverse repos and term deposits. All are new ways for the Fed to tie up surplus liquidity in the financial system and thus tighten its control over interest rates. But it made no decision except to keep testing the new tools.

“Because the Federal Reserve has not previously tightened the stance of policy while holding a large balance sheet, most participants judged that the Committee should consider a range of options and be prepared to adjust the mix of its policy tools as warranted,” the minutes say.

Most FOMC officials said there were no big changes in the economic outlook – the minutes were an unusually brief 10 pages long – and agreed with the decision to taper asset purchases by another $10bn to $45bn a month.
That keeps the Fed on course to end its purchases by the autumn, before raising interest rates some time in the middle of 2015, and then stopping reinvestments in its asset portfolio after that.

 

Source: ft

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