Tags: Fed | Exit | Strategy | Rates | bernanke | easing | end

Fed Favors Exit Strategy of Raising Rates Before Selling Assets

By    |   Wednesday, 18 May 2011 02:42 PM

The Federal Reserve last month began debating how it should start reversing policies that pumped billions of dollars into the economy during the recession. Some members said the Fed might need to start boosting interest rates this year to guard against inflation.

Fed policymakers didn't commit to taking any action at the April 26-27 meeting, according to minutes released Wednesday. But they agreed the economy was improving and if that continued the Fed would need to remove its massive support to prevent consumer prices from getting out of control.

A majority of participants said the best method for tightening credit would be to lift the federal funds rate, which is now at a record low near zero. The federal funds rate is the interest banks pay each other on overnight loans. Raising that rate would likely precede sales of mortgages or Treasury securities in its vast portfolio.

Some members thought the Fed would need to start signaling that record-low interest rates would need to rise. A few members believed the Fed might need to boost its key interest rate or start to sell some of the assets in its portfolio later this year. Both moves would lead to tighter credit and higher rates on consumer loans.

The Fed officials generally agreed that the first step should be for the central bank to stop reinvesting money earned off its holdings of mortgages and Treasury securities.

That's consistent with comments made by Federal Reserve Chairman Ben Bernanke at his first-ever news conference on April 27. Bernanke said halting such reinvestments would be the Fed's first move toward tightening credit. But that would have only a limited impact on the rates Americans pay on loans.

The minutes don't identify what the individual Fed policymakers said.

The Fed stressed the discussion of the removal of monetary stimulus should not be seen as an indication the Fed is ready to start down that road any time soon.

The minutes showed worries about inflation rising among some Fed officials. While policy makers generally believed a higher level of inflation would be transitory, many had become more concerned about upside price risks.

Policymakers worried that if oil prices continued to rise, there might be more pass-through of higher commodity costs into broader measures of prices. They were concerned that inflation, pushed up by higher energy and commodity prices, could set off a self-fulfilling inflationary mind-set.

A few participants in the meeting said the increase in inflation risks meant the Fed should stand ready to tighten financial conditions sooner than had been expected.

Oil prices, however, have dropped sharply since the meeting.

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The Federal Reserve last month began debating how it should start reversing policies that pumped billions of dollars into the economy during the recession. Some members said the Fed might need to start boosting interest rates this year to guard against inflation. Fed...
Fed,Exit,Strategy,Rates,bernanke,easing,end,us,economyy
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2011-42-18
Wednesday, 18 May 2011 02:42 PM
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