FOMC members want plan to end balance sheet reduction, minutes show

Most of the US Federal Open Market Committee said plans for ending balance sheet reduction this year should be announced soon, according to the minutes of their January meeting.   

Some FOMC members also said they were still considering further interest rate increases according to the minutes, released on January 20.

Almost all of the FOMC members “thought it would be desirable to announce before too long a plan to stop reducing the Federal Reserve’s asset holdings later this year,” the minutes say. A majority of members also said they expect the size of balance sheet to be larger than what is required for effective monetary policy implementation.

“Some further very gradual decline in the average level of reserves, reflecting the trend growth of other liabilities such as Federal Reserve notes in circulation, could be appropriate,” the minutes say.

FOMC members said there was little benefit to allowing reserves to continue to fall once the assets have matured and have not been replaced. Falling beyond this level could have costs that exceed the benefits, they say, including “undue risk of volatility in short-term interest rates”.

In fact, participants thought that before ending the process of letting its assets run off the balance sheet, the Fed should be adding assets to offset growth in non-reserve liabilities. This would keep the average level of reserves relatively stable, they say.

Two FOMC members proposed creating a “ceiling facility” to mitigate “temporary unexpected pressures” in the reserves market. A ceiling facility could work to cover short-term liquidity requirements of banks, effectively providing a ceiling for overnight interest rates in the money market.

The facility could “play an important role” in supporting monetary policy implementation at a lower level of reserves, the participants say.

Rate hike to come?

FOMC members raised concerns over several risks facing the US economy, including weaker growth in China and Europe, fading fiscal stimulus, trade disputes and Brexit. Several of them “nudged down their outlooks for output growth since the December meeting”, the minutes say.

But the discussion about the elevated risks to the US economy did not appear to have passed through onto the participants’ outlook for the interest rate path. Several policy-makers indicated “if the economy evolved as they expected, they would view it as appropriate to raise the target range for the federal funds rate later this year”.

Another group of policy-makers “argued that rate increases might prove necessary only if inflation outcomes were higher than in their baseline outlook,” the minutes say.

FOMC members noted that holding the target federal funds rate at 2.45–2.5% “posed few risks at this point”.