Fed set to start reducing balance sheet later this year

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Most Federal Reserve policymakers expect to kick off the process of reducing the size of the central bank’s balance sheet later this year if the economy stays on track, in a sign of rate-setters’ growing confidence in the strength of the recovery, minutes from the latest policy meeting showed.

Members held extensive discussions of their strategy for paring back the Fed’s $4.5tn balance sheet in their meeting of March 14-15, concluding that their intentions on the central bank’s asset portfolio should be communicated to the public well in advance of any change.

The Fed built up its portfolio of bonds and mortgage-backed securities during the financial crisis, but as the economy recovers it has been discussing how to reduce it without disrupting markets. Starting that process would be a major landmark for the Fed as it unwinds its ultra-loose monetary policy.

“Provided that the economy continued to perform about as expected, most participants anticipated that gradual increases in the federal funds rate would continue and judged that a change to the Committee’s reinvestment policy would likely be appropriate later this year,” the minutes recorded.

The Fed also held a discussion over the implications of the strength in equity prices, with some saying prices were “quite high” relative to standard valuation measures. A few said they thought values were being driven more by hopes for corporate tax cuts or higher risk tolerance, than expectations of stronger growth.

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