The Federal Reserve has begun to discuss the tools it could use to finally pull back the extraordinary stimulus it’s provided the U.S. economy since 2008. But Fed officials plan further discussions and have set no timetable for any increase in interest rates.
Minutes of the Fed’s April 29-30 meeting released Wednesday show that officials discussed how to unwind the support they’ve given the economy once they decide to begin raising the Fed’s key short-term rate. That rate has remained at a record low near zero since December 2008.
The minutes stressed that the discussion should not be viewed as a signal that an increase in short-term rates is imminent. Because the economy is still recovering, most analysts don’t think the Fed will start boosting rates before the second half of 2015.
Economists said there was little new information in the minutes, which were released as usual three weeks after the most recent Fed meeting.
“Nothing in the minutes challenges our view that bond buying will end this year but that interest-rate hikes will wait until late 2015,” said Paul Edelstein, director of financial economics at IHS Global Insight.
The Fed is moving into uncharted territory. Never before has it considered raising rates with its investment holdings of Treasury bonds and mortgage-backed securities at such high levels.
The Fed has conducted three rounds of bond purchases in the past five years, driving its balance sheet above $4 trillion, to try to keep long-term rates low to boost the economy. In December, it began scaling back its purchases. But officials have said that even when they stop buying bonds late this year, they don’t plan to start selling their holdings.
The Fed’s discussion of its exit strategy involves how it will manage its investment holdings during a period when it will be starting to raise short-term rates.
The Fed published an exit strategy in 2011. But officials have said that plan needs to be updated to take account of changing economic circumstances and the fact that the bond holdings have grown so much. They’re now four times their size before the financial crisis hit with force in the fall of 2008.
The minutes said no decisions on modifying the exit plan were made at the April meeting. Rather, Fed officials requested that the Fed staff further analyze the available options. The committee said it was time for the Fed to review its options for winding down its stimulus. It also said the Fed would need to communicate its plans clearly to the public.
The minutes noted that “a number of participants” thought it would be useful to provide more information on how long the Fed will continue rolling over its holdings of Treasury and mortgage bonds when they come due. One issue is whether the Fed will modify a view that it would likely start selling its bond holdings before it began raising short-term rates.
William Dudley, president of the Fed’s New York regional bank, this week raised the possibility of delaying a sell-off in the Fed’s bonds until after it starts raising rates. Investors are looking for any hints about when the Fed will begin reducing its holdings, a step that could drive long-term rates up.
Meeting with reporters Wednesday, Dudley also noted continued weakness in the job market, a key focus of the Fed’s support programs.
“Many middle-skilled workers displaced during the recession are likely to find their old jobs will never come back,” Dudley said.
The Fed’s minutes noted the prospect of stronger economic growth after a harsh winter. But the Fed also said “a number of participants pointed to possible sources of downside risk to growth, including a persistent slowdown in the housing sector or potential international developments, such as a further slowing of growth in China or an increase in geopolitical tensions regarding Russia and Ukraine.”