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PR Newswire
24-05-2014, 02:26 PM
http://www.nytimes.com/2014/05/22/busine....html?_r=0
EconOMY
Fed Panel Has Begun to Address How to Gradually Raise Rates
By NELSON D. SCHWARTZMAY 21, 2014
Federal Reserve officials have gingerly begun to take on what will be their most difficult task over the next 12 to 24 months: determining how and when to gradually raise interest rates and return monetary policy to a more traditional path, even as they keep trillions in assets accumulated during the huge stimulus efforts of the last five years.
Officials at the central bank are not anywhere near a final decision on tactics and strategy, nor do they have a definite date in mind, although most experts expect them to take their first step in raising short-term interest rates in mid- to late 2015.
But the minutes of their meeting late last month, released on Wednesday, detail how the members of the Federal Open Market Committee, which consists of representatives of the Fed’s regional banks and the Washington-based Board of Governors, have begun grappling with lifting the interest rate that the Fed uses as its major policy tool from a current level close to zero.
“Obviously, it is still a work in progress,” said Michael Hanson, senior economist at Bank of America Merrill Lynch. “The market anticipated more detail.”
Nonetheless, the minutes suggested that the process is well underway. “This discussion marks the beginning of the post-crisis era,” he said. Mr. Hanson said that holding all those assets on the Fed balance sheet means huge reserves are sitting idle in the banking sector, which in turn makes it much more difficult to raise short-term rates using traditional tools when the Fed finally does decide the time is right to tighten monetary policy.
At the April meeting, policy makers reviewed staff presentations that “outlined several approaches to raising short-term interest rates when it becomes appropriate to do so,” the minutes said.
“Because the Federal Reserve has not previously tightened the stance of policy while holding a large balance sheet, most participants judged that the committee should consider a range of options and be prepared to adjust the mix of its policy tools as warranted,” the minutes said.
The central bank is keeping its options open on how to go about what is one of the most delicate tasks facing Janet L. Yellen, the new chairwoman of the Fed.
“I think the minutes revealed that they don’t know their game plan yet,” said Diane Swonk, chief economist at Mesirow Financial in Chicago and a longtime Fed watcher. “There are still a lot more questions than answers.”
Even as signs are emerging this spring that economic growth is beginning to pick up after a very slow first quarter, the recovery remains fragile. And if rates rise more quickly than expected, there are fears inside and outside the Fed that the already-slowing housing sector could weaken further.
At the meeting on April 29 and 30, Fed officials were guardedly optimistic about an economic rebound, but remained concerned about weakness in the housing market and persistently low inflation, according to the record of their meeting.
They continued to unanimously support the gradual scaling back of monthly bond purchases aimed at stimulating the economy, in part because most officials said they believed economic growth “picked up recently, following a sharp slowdown during the winter due in part to unusually severe weather conditions.”
At the same time, the minutes of the April meeting showed that the committee members were concerned that “inflation was running below the committee’s longer-run objective and was seen as posing possible risks to economic performance.”
Figures released last week indicated inflation might have increased in April to healthier levels not far from the Fed’s 2 percent, but that data was not yet available when the policy makers met.
At the meeting, “most participants commented on the continued weakness in housing activity,” citing factors like higher home prices, construction bottlenecks from a shortage of labor and harsh winter weather, as well as tight credit. The housing sector, which imploded in the years before the financial crisis and recession, has rebounded strongly in recent years, but those gains have been fading as borrowing rates for home buyers rose in the second half of 2013.
Over all, the minutes did not reveal any sharp change in strategy.
In a separate development, the Senate confirmed the nomination of Stanley Fischer, a longtime central banker, as a Fed board member. Mr. Fischer is to become Fed vice chairman after a second formal vote, expected soon, allowing him to take the job Ms. Yellen held before she became chairwoman.
The Fed has been operating short-handed as departures and the slow confirmation process left three vacancies on the seven-member board. Another governor, Jeremy C. Stein, is to step down next week. Lael Brainard, a former Treasury official, is also expected to win confirmation, but it is not clear when that vote will occur.
The next meeting of Fed policy makers is set for June 17 and 18.
EconOMY
Fed Panel Has Begun to Address How to Gradually Raise Rates
By NELSON D. SCHWARTZMAY 21, 2014
Federal Reserve officials have gingerly begun to take on what will be their most difficult task over the next 12 to 24 months: determining how and when to gradually raise interest rates and return monetary policy to a more traditional path, even as they keep trillions in assets accumulated during the huge stimulus efforts of the last five years.
Officials at the central bank are not anywhere near a final decision on tactics and strategy, nor do they have a definite date in mind, although most experts expect them to take their first step in raising short-term interest rates in mid- to late 2015.
But the minutes of their meeting late last month, released on Wednesday, detail how the members of the Federal Open Market Committee, which consists of representatives of the Fed’s regional banks and the Washington-based Board of Governors, have begun grappling with lifting the interest rate that the Fed uses as its major policy tool from a current level close to zero.
“Obviously, it is still a work in progress,” said Michael Hanson, senior economist at Bank of America Merrill Lynch. “The market anticipated more detail.”
Nonetheless, the minutes suggested that the process is well underway. “This discussion marks the beginning of the post-crisis era,” he said. Mr. Hanson said that holding all those assets on the Fed balance sheet means huge reserves are sitting idle in the banking sector, which in turn makes it much more difficult to raise short-term rates using traditional tools when the Fed finally does decide the time is right to tighten monetary policy.
At the April meeting, policy makers reviewed staff presentations that “outlined several approaches to raising short-term interest rates when it becomes appropriate to do so,” the minutes said.
“Because the Federal Reserve has not previously tightened the stance of policy while holding a large balance sheet, most participants judged that the committee should consider a range of options and be prepared to adjust the mix of its policy tools as warranted,” the minutes said.
The central bank is keeping its options open on how to go about what is one of the most delicate tasks facing Janet L. Yellen, the new chairwoman of the Fed.
“I think the minutes revealed that they don’t know their game plan yet,” said Diane Swonk, chief economist at Mesirow Financial in Chicago and a longtime Fed watcher. “There are still a lot more questions than answers.”
Even as signs are emerging this spring that economic growth is beginning to pick up after a very slow first quarter, the recovery remains fragile. And if rates rise more quickly than expected, there are fears inside and outside the Fed that the already-slowing housing sector could weaken further.
At the meeting on April 29 and 30, Fed officials were guardedly optimistic about an economic rebound, but remained concerned about weakness in the housing market and persistently low inflation, according to the record of their meeting.
They continued to unanimously support the gradual scaling back of monthly bond purchases aimed at stimulating the economy, in part because most officials said they believed economic growth “picked up recently, following a sharp slowdown during the winter due in part to unusually severe weather conditions.”
At the same time, the minutes of the April meeting showed that the committee members were concerned that “inflation was running below the committee’s longer-run objective and was seen as posing possible risks to economic performance.”
Figures released last week indicated inflation might have increased in April to healthier levels not far from the Fed’s 2 percent, but that data was not yet available when the policy makers met.
At the meeting, “most participants commented on the continued weakness in housing activity,” citing factors like higher home prices, construction bottlenecks from a shortage of labor and harsh winter weather, as well as tight credit. The housing sector, which imploded in the years before the financial crisis and recession, has rebounded strongly in recent years, but those gains have been fading as borrowing rates for home buyers rose in the second half of 2013.
Over all, the minutes did not reveal any sharp change in strategy.
In a separate development, the Senate confirmed the nomination of Stanley Fischer, a longtime central banker, as a Fed board member. Mr. Fischer is to become Fed vice chairman after a second formal vote, expected soon, allowing him to take the job Ms. Yellen held before she became chairwoman.
The Fed has been operating short-handed as departures and the slow confirmation process left three vacancies on the seven-member board. Another governor, Jeremy C. Stein, is to step down next week. Lael Brainard, a former Treasury official, is also expected to win confirmation, but it is not clear when that vote will occur.
The next meeting of Fed policy makers is set for June 17 and 18.