Thursday, 19 October, 2017

Fed minutes reveal debate over inflation and Trump

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Juana Turner | 14 April, 2017, 01:05

"The Fed hasn't decided whether it will cease the reinvestment policy in one fell swoop or cushion the blow by phasing out reinvestment more gradually", Ashworth added.

But the minutes indicated a general view among Fed officials that if the economy remained solid as expected, a change in their policy of keeping the holdings unchanged "would likely be appropriate later this year". "But the analysis we've done, others have done, I don't think this is a significant risk to financial stability". "They don't want a shock-and-awe impact".

The length of time it takes would depend on how far officials want to trim a balance sheet swollen to $US4.5 trillion by three rounds of asset purchases created to protect the U.S. economy from the financial crisis.

The U.S. Non-Manufacturing Index registered 55.2 percent in March, below market expectations of 57, the Institute for Supply Management (ISM) said in its monthly survey.

The minutes from the Federal Reserve's meeting in March revealed that central bank officials saw a gradual rate of interest rate hikes, though several said they wanted a faster pace.

"Higher liquidity in the form of QE has helped the economy early on after the financial crisis of 2008 but in subsequent years it was not the liquidity that drove the prices higher, but rather the growing economy and earnings", Pearkes said. If the Fed stops recycling proceeds from the sale of matured bonds, upward pressure on long-term interest rates will intensify, weighing on housing investment and capital spending. Now the Fed is gradually reducing that support.

ADP released its latest employment figures, with private sector payrolls rising by 263,000 last month. "We still anticipate an additional three 25bp rate hikes this year, taking the fed funds rate to between 1.50% and 1.75% by year-end".

Stocks had jumped early on after payroll processor ADP said private USA businesses added 263,000 jobs in March, which was more than analysts expected. Unemployment, presently at a low of 4.7 percent, is directly tied to inflation forecasts. Strong data could encourage the Fed to announce another rate hike at its upcoming June meeting.

The Fed also said that it ws unsure about Trump's economic policies. Yet the administration has confronted early hurdles pushing its tax and health-care plans through Congress, and ambitious promises from the campaign trail on trade and infrastructure have not yet been met.

"About half of the participants did not incorporate explicit assumptions about fiscal policy in their projections", details form the March 14-15 meeting read.

While most believed his plans had the potential to boost growth, some said there were also downside risks from a possible adverse economic reaction from Mr. Trump's measures to limit immigration and to increase trade barriers to protect American workers.

Downside risks from the global economy were seen to have diminished.

Nevertheless, they were picked apart by bond traders, who seized on one remark from Mr. Dudley that a move to unwind the Fed's balance sheet would probably be accompanied by a "little" pause in raising interest rates. "Signs that the Fed could pare its balance sheet is shocking enough, but the mood was exacerbated as the Fed touched upon stock valuations, which is very rare", he added.

Risk appetite stabilised, having been soured by signs the Federal Reserve might start paring asset holdings later this year and that the chances of early US fiscal stimulus may be evaporating. Two positions are open on the Fed's Board of Governors, while another was set to be vacated on Friday with the resignation of Daniel Tarullo.

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