The Canadian Press - ONLINE EDITION

Fed minutes show officials looking to October end to bond buying with final $15 billion cut

  • Print

WASHINGTON - Federal Reserve officials are in broad agreement that they will likely announce an end to their monthly bond buying program in October, bringing to a close the third round of massive bond purchases the central bank has relied upon to boost economic growth following the Great Recession.

Minutes of the Fed's June 17-18 meeting released Wednesday showed officials were in basic agreement that the if the economy continues to improve, the final reduction in bond purchases would total a cut of $15 billion and would be announced at the Fed's Oct. 28-29 meeting.

With that final reduction, the Fed's balance sheet will be close to $4.5 trillion, more than four times the amount of the balance sheet when the financial crisis struck in the fall of 2008. The Fed has purchased Treasury bonds and mortgage-backed securities as a way to lower long-term interest rates to give the economy a boost.

Fed officials have said they will not immediately start selling off the holdings, a move that could send interest rates rising. But instead will reduce the holdings only gradually.

The minutes showed that the Fed had a lengthy discussion on just how it planned to accomplish that reduction in its balance sheet but no final decisions were made. But the minutes said officials believed it will be important to have a "simple and clear approach" that could be communicated to financial markets and the public.

It said the Fed expected to release a plan later this year "well before the first steps" were taken to start reducing the bond holdings. The Fed's move to begin selling off its holdings could have a significant impact on interest rates.

The minutes showed there was a continuation of a debate central bank officials have been having over how to signal the first move to start raising its benchmark short-term interest rate, which has been at a record low near zero since December 2008.

This discussion featured a range of views split between Fed officials who believed the central bank should communicate its continued concerns that inflation is too low and therefore rates needed to stay low and those who were worried that the economy might rebound in the second half of this year at a faster pace than expected and faster moves to raise rates could be warranted.

In the end, the Fed statement stuck to the current guidance that rates will likely remain low for a "considerable time" after the bond purchases end.

Wall Street had little reaction to the minutes with stocks extending gains in the absence of any strong signal from the Fed that its first hike in short-term rates could come sooner than investors now expect.

Wall Street had little reaction to the minutes with stocks extending gains in the absence of any strong signal from the Fed that its first hike in short-term rates could come sooner than investors now expect. The Dow Jones industrial average rose 78.99 points, or 0.5 per cent, to 16,985.61.

The minutes showed that Fed officials discounted the big drop in economic growth in the first three months as a slump that reflected temporary factors. They continued to express optimism that the economy will rebound to healthy growth rates for the rest of this year.

"Fed officials were not overly worried by either the decline in first-quarter GDP or the evidence of a pickup in inflation," said Paul Ashworth, chief U.S. economist at Capital Economics.

The minutes did reveal that several Fed officials saw developments in Iraq and Ukraine "as posing possible downside risks to global economic activity or potential upside risks to world oil prices."

At its June meeting, the Fed kept policy essentially unchanged, holding its key short-term interest rate at a record low near zero, where it has been since December 2008. It also made a fifth $10 billion reduction in its monthly bond purchases, bringing them down to $35 billion a month. Before the reductions began in December, the purchases, aimed at keeping long-term interest rates low, stood at $85 billion per month.

The minutes showed that Fed officials discussed a question they have been getting about whether the last reduction in purchases might total $15 billion or $5 billion. According to the minutes, the participants said it would be appropriate to reduce the bond purchases by $15 billion in the last move, which would occur at the October meeting, rather than hold off and make a final $5 billion reduction in December.

This discussion indicated that the Fed expects to announce another $10 billion cut at the next meeting on July 29-30 and follow that with a further $10 billion cut announced at the September meeting and then the last reduction of $15 billion at the October meeting.

But Fed officials stressed that action did not signal an earlier move to start boosting its short-term rates.

Most private economists believe the Fed's first rate hike will not occur until next summer although some believe the move could occur a few months sooner if the labour market continues to show healthy gains in employment.

The government reported last week that the unemployment rate fell to 6.1 per cent in June, the lowest level since September 2008, the month the financial crisis hit with force, while 288,000 jobs were created, the fifth straight monthly gain above 200,000.

The minutes were released Wednesday with the customary three-week delay since the last meeting.

Fact Check

Fact Check

Have you found an error, or know of something we’ve missed in one of our stories?
Please use the form below and let us know.

* Required
  • Please post the headline of the story or the title of the video with the error.

  • Please post exactly what was wrong with the story.

  • Please indicate your source for the correct information.

  • Yes

    No

  • This will only be used to contact you if we have a question about your submission, it will not be used to identify you or be published.

  • Cancel

Having problems with the form?

Contact Us Directly
  • Print

You can comment on most stories on winnipegfreepress.com. You can also agree or disagree with other comments. All you need to do is be a Winnipeg Free Press print or e-edition subscriber to join the conversation and give your feedback.

You can comment on most stories on winnipegfreepress.com. You can also agree or disagree with other comments. All you need to do is be a Winnipeg Free Press print or e-edition subscriber to join the conversation and give your feedback.

Have Your Say

New to commenting? Check out our Frequently Asked Questions.

Have Your Say

Comments are open to Winnipeg Free Press print or e-edition subscribers only. why?

Have Your Say

Comments are open to Winnipeg Free Press Subscribers only. why?

The Winnipeg Free Press does not necessarily endorse any of the views posted. By submitting your comment, you agree to our Terms and Conditions. These terms were revised effective April 16, 2010.

letters

Make text: Larger | Smaller

LATEST VIDEO

Winnipeg Cheapskate: Cheap summer weekends

View more like this

Photo Store Gallery

  • MIKE.DEAL@FREEPRESS.MB.CA 100615 - Tuesday, June 15th, 2010 The Mane Attraction - Lions are back at the Assiniboine Park Zoo. Xerxes a 3-year-old male African Lion rests in the shade of a tree in his new enclosure at the old Giant Panda building.  MIKE DEAL / WINNIPEG FREE PRESS
  • A mother goose has chosen a rather busy spot to nest her eggs- in the parking lot of St Vital Centre on a boulevard. Countless cars buzz by and people have begun to bring it food.-Goose Challenge Day 06 - May 08, 2012   (JOE BRYKSA / WINNIPEG FREE PRESS)

View More Gallery Photos

Poll

Should the city grant mosquito buffer zones for medical reasons only?

View Results

View Related Story

Ads by Google