WASHINGTON—Minutes from the Federal Open Market Committee's June meeting show committee members are at odds on when the Federal Reserve should begin trimming its balance sheet, and one analyst says the lack of consensus could lead to a delay in the Fed's next rate hike until 2018.
"There is evidently a debate among Fed officials on whether to begin trimming the balance sheet in September or December," said Curt Long, NAFCU's chief economist and director of research. "The Fed has been communicating its plans for some time now, and the pace should be sufficiently slow as to result in little market reaction once that process does get underway.
"But if the Fed waits until December – due to persistently sluggish inflation or a delay in resolving the debt ceiling debate, for example – it would likely mean that the next rate hike will be put on hold until 2018," he added.
At the close of its two-day policy-setting meeting in June, the FOMC raised the federal funds target rate by a quarter-point to a range of 1% to 1.25%. The FOMC also indicated plans to start reducing the size of the Federal Reserve's balance sheet.
But the newly-released minutes reveal the differing viewpoints on this issue, noted Long.
"Participants expressed a range of views about the appropriate timing of a change in reinvestment policy," the minutes state. "Several preferred to announce a start to the process within a couple of months; in support of this approach, it was noted that the Committee’s communications had helped prepare the public for such a step . . . However, some others emphasized that deferring the decision until later in the year would permit additional time to assess the outlook for economic activity and inflation."
Also of note from the June minutes, according to Long:
- Committee members noted continued strengthening in labor market conditions
- Members viewed the slowdown on headline and core personal consumption expenditure price inflation "as largely reflecting idiosyncratic factors, including sharp declines in prices of wireless telephone services and prescription drugs" and expect it will have little bearing on inflation over the medium run
- Some members, when discussing recent developments in financial markets, "expressed concern that subdued market volatility, coupled with a low equity premium, could lead to a buildup of risks to financial stability"
The FOMC's next policy setting meeting is scheduled for July 25-26.