A key highlight from the minutes for the Federal Reserve’s March 14-15 meeting at which it raised interest rates was increasing focus on the need for the Fed to begin shrinking its $4.5 trillion balance sheet. To keep interest rates low during the financial crisis, the Fed bought Treasuries and other mortgage-related securities. “Survey results indicated that market participants saw a change in the FOMC’s policy of reinvesting principal payments on its securities holdings as most likely to be announced in late 2017 or the first half of 2018,” the meeting minutes detailed.
When the decision is made to change the reinvestment policy, “participants generally preferred to phase out or cease reinvestments of both Treasury securities and agency MBS,” according to the minutes. Any such change would be communicated the public “well in advance of an actual change.”
The FOMC says that information reviewed ahead of the meeting suggested the labor market strengthened further in January and February and that gross domestic product continued to expand in the first quarter. It also pointed out that the 12-month change in consumer prices had moved up in recent months and was near its longer-run objective of 2%. Employment growth was “brisk” to start the year, according to the minutes, which noted that the U.S. economy was operating “at or near maximum employment.” The inflation rate is nearing the committee’s 2% objective, but members differ on whether accommodation should be scaled back slowly or quickly in response.
The FOMC maintained its assumption for “a more expansionary fiscal policy in the coming years,” but it pushed back the timing for when those policy changes would likely take effect. The committee also noted that incoming economic information was consistent with expectations, so their economic outlook had changed minimally since the January-February FOMC meeting. They view risks to the economic outlook as “roughly balance overall,” and they “continued to underscore the considerable uncertainty about the timing and nature of potential changes to fiscal policies as well as the size of the effects of such changes on economic activity.”
The minutes go on to detail: “Most participants continued to view the prospect of more expansionary fiscal policies as an upside risk to their economic forecasts. At the same time, some participants and their business contacts saw downside risks to labor force and economic growth from possible changes to other government policies, such as those affecting immigration and trade. Participants generally viewed the downside risks associated with the global economic outlook, particularly those related to the economic situation in China and Europe, as having diminished over recent months. At the same time, several participants cautioned that upcoming elections in EU countries posed both near-term and longer-term risks.”
The FOMC still generally believes that a gradual pace of rate increases is appropriate. One member voted against the March rate hike, arguing the increase was “premature”
