US Federal Reserve starts two-day meeting

The US Federal Reserve has started a two-day policy meeting, most likely setting a start date for the shrinking of its massive US$4.2 trillion (S$5.7 trillion) bond portfolio.

WASHINGTON (Reuters) - Federal Reserve policymakers met on Tuesday (July 26) for the first time since they voted to raise interest rates in June. 

They will most likely talk about shrinking the Fed's massive US$4.2 trillion (S$5.73 trillion) bond portfolio.'s chief financial analyst Greg McBride says this month's meeting should bring more clarity about when the trimming begins. 

"I expect that they will begin normalising the balance sheet probably around October. I think the formal announcement of that will come at the September Fed meeting, which will be accompanied by the updated economic projections, as well as the Janet Yellen press conference, and that the next time we can expect a rate hike will likely not be until the December meeting, and, of course, the caveat there is we have to see the inflation numbers begin to show some sign of a rebound," said McBride. 

The Fed bought US treasuries and mortgage-backed securities in a programme known as 'quantitative easing'. 

That drove interest rates to record lows to increase borrowing and help the economy recover from the financial crisis. 

But in June, the Fed said that, at some point in the near future, it plans to let US$6 billion a month in treasuries mature without reinvestment, and then increase that amount to up to US$30 billion. 

It also said, it will run down its agency debt and mortgage backed securities by US$4 billion a month until it reaches US$20 billion. 

"There is so much focus on the Fed, and why it's kept interest rates so low, and why the Fed has such a big balance sheet. The answers to all of these questions really are in the balance sheets of of the private sector where we still, although things are more stable than they were during the last recession, certainly, very large amounts of debt and income relative to, sorry, debt and asset value, relative to small income in the economy, that is a problem here, it's a problem for the rest of the world. There is more financial instability coming. I don't think the next one is gonna be coming from the United States," said David Levy, an economist at Jerome Levy Forecasting Centre.

The minutes of the Fed's June meeting showed a split between Fed governors ready to start balance sheet reductions in "a couple of months" and those wanting to wait for more economic data.