Fed mulls policy exit, eyes October end of asset purchases

Friday, 11 July 2014 00:55 - - {{hitsCtrl.values.hits}}

Reuters: The Federal Reserve has begun detailing how it plans to ease the US economy out of an era of loose monetary policy, indicating it will end its asset purchases in October and appearing near agreement on a plan to manage interest rates in the future, according to minutes of the last Fed policy meeting.

The minutes from the June 17-18 meeting indicate the Fed envisions using overnight repurchase agreements in tandem with the interest it pays banks on excess reserves to set a ceiling and floor for its target interest rate. Though no decisions have been announced, the discussion has become detailed enough for Fed officials to contemplate the proper spread between the two – mentioned in the minutes as 20 basis points. The minutes showed the Fed participants also ‘generally agreed’ that monthly bond purchases would end in October, with a final reduction of $ 15 billion in monthly purchases of US Treasuries and mortgage-backed securities. Fed officials expressed overall confidence that moderate economic growth will continue and unemployment and inflation will gradually move towards the central bank’s targets. If anything, there was concern recent low volatility in financial markets showed investors ‘were not factoring in sufficient uncertainty’. According to the minutes, there continues to be division over when the Fed should stop reinvesting proceeds of the $ 4.2 trillion in assets it purchased to support financial markets. Ending reinvestment will put the central bank’s balance sheet on a declining path, and some members argue that should not take place until interest rates have been increased. In addition, the minutes indicated the reinvestment decision may not be an all-or-nothing choice: the central bank may try to “smooth the decline in the balance sheet,” perhaps by letting some maturities expire each month and reinvesting the proceeds of others. The Fed’s exit strategy is complicated because its stimulus programs flooded the financial system with $ 2.6 trillion that has ended up back at the Fed as excess bank reserves. With that much money on hand, banks have little need to borrow from each other in the federal funds market - stifling an important interest rate tool.