Fed looks set to trim investment holdings

News of possible stimulus rollback comes as Fed's confidence over US economy grows

WASHINGTON • The United States Federal Reserve expects to start reducing its huge investment holdings later this year, unwinding a giant programme undertaken in the wake of the financial crisis to revive the economy.

The holdings - which amount to more than US$4 trillion (S$5.6 trillion) in Treasury and mortgage securities - are a legacy of the Fed's campaign to help the economy recover from the depths of a recession. The Fed, increasingly confident that the American economy is "at or near maximum employment", is beginning to loosen its grip on the economy, according to an official account that the Fed published on Wednesday.

Officials had voted at the meeting last month to raise the Fed's benchmark interest rate - the third time since the financial crisis - to a range of 0.75 per cent to 1 per cent.

Since the meeting, Fed officials have said that it is on course to increase rates by at least an additional half a percentage point this year.

Both the low rates and the investments were intended to support growth by encouraging risk-taking and borrowing by consumers and businesses. Now the Fed is gradually reducing that support.

No decision was made about the timing or the details of any move to reduce the Fed's holdings.

STRONGER ACTION NEEDED

Financial conditions remain very accommodative and, in our view, the central bank has more work to do to minimise the risks of financial imbalances building up in worrisome ways.

MR BOB MILLER, head of BlackRock's fixed-income team.

The markets took the news with relative calm, suggesting that investors share the central bank's assessment that the economy is on the right track. Indeed, some analysts said the Fed might need to take stronger steps to end its stimulus campaign.

"Financial conditions remain very accommodative and, in our view, the central bank has more work to do to minimise the risks of financial imbalances building up in worrisome ways," said Mr Bob Miller, the head of BlackRock's fixed-income team.

Some Fed officials also are nervous about the stock market's climb, the account said.

It noted that stock prices are "quite high relative to standard valuation measures", and that some Fed officials saw a risk to the economy "if, for example, financial markets were to experience a significant correction".

The Fed accumulated trillions in Treasury and mortgage securities in a series of campaigns after the 2008 financial crisis as part of its effort to put downward pressure on borrowing costs.

It has maintained the size of those holdings by reinvesting the proceeds from maturing securities.

The meeting account said discussions would continue at the Fed's next policy meeting next month on whether to end reinvestment abruptly or gradually, and whether to deal with Treasury and mortgage bonds on the same timetable.

The Fed, which predicted a continued improvement in economic conditions, has said that it expects to raise rates three times this year.

NYTIMES

A version of this article appeared in the print edition of The Straits Times on April 07, 2017, with the headline 'Fed looks set to trim investment holdings'. Print Edition | Subscribe