Two regional Federal Reserve presidents signaled that policy makers may announce the timing of the balance-sheet unwind when they meet next month, as the U.S. economy shows itself strong enough to withstand a return to more normal monetary policy.
The September Federal Open Market Committee meeting “would be an appropriate time to do this,” San Francisco Fed chief John Williams told reporters of balance-sheet normalization. He said that’s consistent with what policy makers have been communicating throughout the year, not an acceleration.
“As we’ve gotten closer, our communication has narrowed this down a bit, and market participants on their own have kind of come to this conclusion,” he said.
In an interview with the Wall Street Journal published Wednesday, Boston Fed President Eric Rosengren signaled he, too, might support a balance-sheet announcement at the Sept. 19-20 gathering.
“The market has appropriately started to say, ‘Gee, this seems to be about the right time”’ to announce the wind-down of the balance sheet, said Rosengren. With the federal funds rate target range well above zero, “there’s no reason to have that extraordinary accommodation coming from the balance sheet any longer,” he said.
The start of balance-sheet normalization would mark another policy milestone in an economic recovery now in its ninth year. The Fed bought trillions of dollars of securities to lower long-term borrowing costs after cutting the main interest rate to zero in December 2008.
U.S. central bankers throughout 2017 have signaled they would start unwinding the balance sheet this year, and in their latest communique said the policy would begin “relatively soon.” Cleveland Fed’s Loretta Mester repeated that statement during an event in Cincinnati on Wednesday, adding that the policy wouldn’t cause market disruptions.
Policy makers were less clear about when the next interest-rate increase will occur. Williams said that forecasts for one more hike this year seem appropriate, while St. Louis Fed President James Bullard told news agency MNI in an interview on Wednesday he wouldn’t support raising rates in the near term out of concern for low inflation.
Price gains have moderated this year even as unemployment has fallen below the level Fed officials see as sustainable over the longer run. The Fed’s preferred inflation gauge climbed by only 1.4 percent in June. Policy makers have repeatedly said that they view the slowdown as transitory, though they acknowledged in their July post-meeting statement that price measures have “declined and are running below” their aim of 2 percent.
“We still have a ways to go in terms of inflation,” Williams said, noting that measures that strip out transitory factors, like the Dallas Fed’s trimmed mean index, point to stronger gains. “To keep the economy on a sustainable path of growth, we need to gradually reduce the monetary stimulus put in place during the recession and recovery.”
Both Mester and Williams emphasized that gradual policy tightening is important to avoid overheating in the economy, which would necessitate an abrupt path of hikes.
“The gradual path that the FOMC has communicated for some time is appropriate given the outlook will help prolong the expansion, not curtail it,” Mester said. “The gradualism has allowed us to follow a consistent strategy even as the data on the economy and inflation have shown some fluctuations."
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