por admin » Mié May 18, 2011 1:20 pm
ECONOMYMAY 18, 2011, 2:12 P.M. ET
Fed Officials See Gradual Exit Strategy, Minutes Show
By LUCA DI LEO And JON HILSENRATH
WASHINGTON—Federal Reserve officials appeared to agree at their last meeting that letting the central bank's huge balance sheet slowly shrink was likely to be the first step toward tightening monetary policy, though they aren't ready to start executing the plan until they are sure the economy can bear it.
Minutes of the April 26-27 Federal Open Market Committee meeting, released Wednesday, showed Fed officials had an extensive discussion about what's known as their exit strategy.
Similar to the U.S. military withdrawal from Iraq, the Fed's exit strategy carries much uncertainty because it's never been done before. Fed officials have indicated the process is likely to be gradual and must be flexible because conditions may change.
The first step, as Fed Chairman Ben Bernanke indicated in a news conference following the FOMC meeting, will be a decision to allow the Fed's portfolio of some $900 billion mortgage-backed securities to mature without reinvesting the proceeds, which will shrink its overall portfolio.
Accompanying that decision, or possibly following it shortly thereafter, will be a decision to also let around $1.5 trillion Treasury holdings to gradually run down.
At some point, the Fed will actively sell its mortgage holdings in a steady modest program. But officials were inclined to hold off on asset sales until after they had taken other more traditional steps like raising the interest rate at which banks lend to each other overnight, the minutes showed.
"A majority of participants preferred that sales of agency securities come after the first increase in the FOMC's target for short-term interest rates," the minutes showed. "Many of those participants also expressed a preference that the sales proceed relatively gradually," for instance over five years.
The exit strategy is important because of the unusual steps the Fed took during and after the financial crisis, which led its balance sheet to triple to some $2.7 trillion since the summer of 2008 as the Fed fought the financial crisis by buying mortgage and government bonds to keep borrowing costs low.
In normal times, when the Fed wants to tighten financial conditions, it simply raises the short-term federal funds rate. A tightening in the next cycle will entail many other complicated steps aimed also at reducing its securities holdings and draining cash that it pumped into the banking system.
The written record of the FOMC meeting also showed Fed officials expect inflation to rise this year on the back of surging energy and food prices. But the majority believes the increase will be temporary and the central bank can therefore afford to keep the credit tap wide open for some time.
