Thursday, 13 December, 2018

US Federal Reserve minutes hint at rate rise next month

Nellie Chapman | 25 May, 2017, 06:56

Fed policymakers agreed they should hold off on raising interest rates until they see evidence that a recent economic slowdown was transitory, the minutes from their last policy meeting showed on Wednesday. Most economists and investors have said they think the Fed will raise rates twice more this year, with the next one occurring after the next policy meeting ends June 14.

The discussion continued around the two sides of the Fed's mandate, with doves highlighting inflation's current low readings and showing concern regarding expectations, while more hawkish members noted the undershooting of the jobless rate and the potential for this to lead to an eventual overshooting of inflation, noted TD Economics.

Oil prices were lower after the Energy Information Administration said USA crude oil inventories fell for the seventh straight week.

However, Yellen is the first to acknowledge the United States economy still faces challenges, such as slow growth, sluggish wage growth and millions of workers who feel left out of the recovery from the recession.

The central bank now holds around US$4.5 trillion of assets after its enormous quantitative easing programme following the financial crisis and could begin to shrink this sooner than markets had anticipated.

The peso has tracked upwards since Mexico's central bank unexpectedly hiked its benchmark interest rate by 25 basis points to 6.75 percent on Thursday.

Monetary policymakers say they may wait, however, to see if weak growth recorded earlier this year was only temporary, which seems to open the possibility that the next rate increase could be delayed until after June.

In the minutes, the Federal Reserve mentioned several times that the recent slowdown in growth was likely to be "transitory" and that the economy would likely rebound in coming months. "You have to put "benefited" in quotation marks, because it was an indication that the economy wasn't doing well". The officials say they want to raise rates a little more before they start selling that debt.

At its meeting in May, central bankers discussed a possible method for reducing this balance sheet.

Under the plan, a limit would be set on the amount of securities allowed to fall off the balance sheet every month.

The Fed does not want to sell the assets on its $4.5 trillion balance sheet, preferring to let it shrink as the securities mature.

At the May meeting, almost all officials "expressed a favourable view" of a staff-presented general approach to shrinking the balance sheet that would involve gradually increasing run-off caps every three months. Almost all Fed officials said they were content with a plan to end the reinvestment of principal of maturing securities - the main approach favored to shrink the balance sheet instead of asset sales- in slow, ever-increasing, stages, rather than ending the reinvestment all at once.

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