Thread: Federal Reserve will start reducing its $4.5 TRILLION stockpile of bonds

Federal Reserve will start reducing its stockpile of bonds

Jim Puzzanghera and Don Lee Contact Reporters


The Federal Reserve announced Wednesday that it would start slowly reducing the trillions of dollars in bonds it bought to try to stimulate the economy, another milestone in the central bank’s efforts to return to a normal monetary policy after the Great Recession.

The long-awaited reduction in the Fed’s $4.5-trillion balance sheet comes amid great uncertainty at the central bank. There are several vacancies on the Fed board, and there could be a change in leadership early next year if President Trump decides not to renominate Chair Janet L. Yellen.

On top of that, the devastation caused by recent severe hurricanes could make it difficult for Fed policymakers to get a solid read on the economy in the coming weeks as they decide whether to enact another small hike in a key interest rate.

“Hurricanes Harvey, Irma and Maria have devastated many communities, inflicting severe hardship,” Fed officials said in a policy statement Wednesday after their two-day meeting.

“Storm-related disruptions and rebuilding will affect economic activity in the near-term, but past experience suggests that the storms are unlikely to materially alter the course of the national economy over the medium term,” the Fed statement said.

One short-term effect of the hurricanes will be higher gasoline prices, which “will likely boost inflation temporarily,” the Fed said.

But economists say that negative short-term effects caused by the storms, such as shutdowns by businesses in the affected areas, usually are offset by a boost in activity when rebuilding begins.

The actions by Fed policymakers Wednesday demonstrated their confidence that the hurricanes will not cause long-term economic damage in the U.S.

As expected, central bank officials voted to hold the benchmark federal funds rate steady at between 1% and 1.25%. But they still are forecasting another increase of 0.25 of a percentage point by the end of the year — a signal they think the economy is still on solid ground.

Fed policymakers actually revised up their forecast for economic growth this year to 2.4% from a 2.2% projection in June.

Their projections remained the same as in June for the unemployment rate, which is forecast to be at 4.3% by the end of the year, and inflation, which is expected to be at an annual 1.6% rate by the end of 2017.

Fed officials have been signaling for months that they planned to start reducing the Treasury bonds and mortgage-backed securities the central bank began buying in 2008 to try to stimulate growth by pushing down mortgage and other long-term interest rates.

The advanced telegraphing of the move was designed to avoid rattling investors, and financial markets have remained calm as the Fed moved closer to another key step in reversing its unprecedented stimulus policies.

On Wednesday, the Fed announced it would begin the reductions next month based on a plan approved in June.
The Fed plans to gradually allow an increasing amount of proceeds from maturing securities to be run off the central bank’s books each month. As the bonds mature, the government pays the face value to the Fed. The Fed would keep some of the proceeds instead of reinvesting them in new bonds.

The amount of proceeds would start at $10 billion a month and increase over the course of a year until they reach $50 billion a month.

Yellen said in June that the plan would lead to “a gradual and largely predictable decline” in the assets.

http://www.latimes.com/business/la-f...920-story.html