Janet Yellen, chair of the U.S. Federal Reserve, arrives for a welcome dinner during the Jackson Hole symposium in Wyoming, U.S. (Photographer: David Paul Morris/Bloomberg)

Most Fed Officials Saw Tightening Soon, Favored Unwind Plan

(Bloomberg) -- Most Federal Reserve officials judged “it would soon be appropriate” to tighten monetary policy again and backed a plan that would gradually shrink their $4.5 trillion balance sheet.

“Most participants judged that if economic information came in about in line with their expectations it would soon be appropriate for the committee to take another step in removing some policy accommodation,” according to minutes from the Federal Open Market Committee’s May 2-3 gathering released Wednesday in Washington.

The statement points toward a hike as soon as the Fed’s meeting in mid-June, though FOMC voters added the caveat that “it would be prudent” to wait for evidence that a recent slowdown in economic activity had been transitory.

“‘Soon’ sounds to us like June,” Harm Bandholz, chief U.S. economist at UniCredit Bank AG in New York, wrote in a note to clients. “The Fed has always said that the policy outlook is data dependent, and this is no different.”

U.S. stocks pushed to a fresh intraday record, while the dollar slipped with Treasury yields as minutes from the Fed’s last meeting showed officials unperturbed by recent signs of economic weakness.

Officials opted at the May meeting to leave the target range for their benchmark lending rate unchanged at 0.75 percent to 1 percent. They have projected three rate increases in 2017, including the hike they made in March.

Investors see a solid chance of a rate move in June, with pricing in federal funds futures indicating nearly an 80 percent chance of an increase.

Most Fed Officials Saw Tightening Soon, Favored Unwind Plan

Policy makers have also said they would like to start shrinking their bloated balance sheet by year-end, a move that may lift longer-term borrowing costs and dampen growth.

At the May meeting, nearly all officials “expressed a favorable view” of a staff-presented general approach to shrinking the balance sheet that would involve gradually increasing run-off caps every three months. The caps would would start off low and eventually reach fully phased-in levels, which would then be held in place until the size of the balance sheet was normalized.

This Year

Policy makers agreed that they should provide additional details of the plan “soon” and nearly all said it would be appropriate to start the process this year, provided their expected path for rate hikes stays on track.

In their closed-door meeting, officials discussed a brightening global economic picture and viewed recent soft inflation and output data as likely caused by transitory factors.

Growth slowed in the first quarter to an annualized pace of 0.7 percent, even as unemployment continued to decline. Labor Department data released two days after the meeting showed the jobless rate in April fell to 4.4 percent, the lowest reading since 2007 and beneath most economists’ estimates of the lowest sustainable level.

Progress toward the Fed’s 2 percent inflation goal, however, has wavered, which could be a problem for the central bank should that persist. The Fed’s preferred gauge of price pressures fell to 1.8 percent in March from 2.1 percent the month before and the core index, which excludes energy and food, dipped to 1.6 percent.