Several Federal Reserve officials wanted to start reducing the trillions of dollars of assets held by the central bank “within a couple of months” to accelerate the return to a more normal monetary policy after years of battling the Great Recession, according to an account released Wednesday of their most recent meeting.
But other members of the policymaking Federal Open Market Committee advocated for waiting until later this year to start slowly scaling back the Fed’s $4.5-trillion balance sheet to allow more time to assess the state of the economy, the minutes of the June 13-14 meeting said.
After that meeting, the Fed announced that they planned to start reducing the balance sheet sometime this year but provided no timetable.
The amount of assets on the Fed’s balance sheet more than quadrupled to $4.5 trillion since 2008 as the central bank bought Treasury bonds and mortgage-backed securities to try to stimulate the economy.
Economists said the asset purchases helped lower mortgage rates and spur investment activity.
Even though the Fed stopped buying bonds in 2014, the amount of assets has remained roughly the same because the money from maturing ones has been reinvested in new ones.
Allowing some of those maturing bonds to start running off the Fed’s books presents risks because the move could increase borrowing costs.
Reducing the size of the balance sheet — along with ongoing increases in a key short-term interest rate — is seen as a key step in the long recovery from the 2007-09 recession.
The minutes from the June meeting offered no new indications of when the next rate hike would come. Fed policymakers voted 8-1 in June to nudge up the benchmark federal funds rate. The increase of 0.25 percentage point raised the rate to between 1% and 1.25%.
It was the third such increase in six months.
In their forecasts, Fed officials have signaled another small rate hike is coming this year and three more in 2018 until the rate reaches about 2.1%. A few committee members who supported the June increase “indicated that they were less comfortable” with the forecasts for additional hikes through the end of next year because of concerns inflation would remain below the Fed’s 2% annual target, the minutes said.
Several policymakers supported slowing the pace of interest rate increases and allowing the already low unemployment rate to decline further in order to increase inflation and wage growth.
The Fed’s next meeting is July 25-26. The Fed won’t meet after that until late September. Fed Chairwoman Janet L. Yellen will hold her quarterly news conference after that meeting, which would allow her to explain the start of the balance sheet reduction plan.
The plan, approved in June, involves the Fed slowly reducing its holdings by gradually allowing an increasing amount of maturing securities to be run off each month. The amount would start at $10 billion and increase until it reached $50 billion a month.
Over time, the Fed’s assets would be reduced “to a level appreciably below that seen in recent years” but larger than before the crisis, officials said.
After the June meeting, Yellen said the plan would lead to “a gradual and largely predictable decline” in the assets. The reductions would begin this year “provided that the economy evolves broadly” as Fed officials are forecasting, she said.