Wall Street closes lower as Federal Reserve considers trimming its balance sheet

Apr 06, 2017, 02:23

Most Federal Reserve policymakers believe that the central bank should begin trimming back its $4.5 trillion balance sheet this year, provided that economic data holds up.

At a news conference after the Fed's policymaking committee announced the rate hike in March, Fed chair Janet Yellen emphasize that the committee wants to use changes in the short-term interest rate target as its main tool for influencing monetary policy, not the balance sheet. The minutes showed that Fed officials mostly preferred to tie the change to the strength of the economy, and to gradually phase out reinvestments of the proceeds from the Treasury and mortgage-backed securities that mature, rather than suddenly ceasing reinvestments altogether.

Interestingly, some members of the Fed also noted that seemingly non-economic policies that Trump has thrown around could end up weighing on economic activity.

Parts of his agenda, such as healthcare - which has considerable consequences for taxation - have stalled amid divisions in the majority Republican Party.

The central bankers now expected President Donald Trump's plans for expansionary fiscal policy would likely not begin until 2018.

While FOMC members expected gradual economic growth, the minutes also show some disagreement over the near-term dangers of inflation.

Members were split over whether stronger inflation warranted faster hikes now or a more gradual pace given the persistence of low inflation in the past.

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But Mr Weston said the minutes were not the only factor weighing on investors overnight. Reducing the balance sheet could have the same impact on the markets as a rate hike.

"Fed officials remain split on the question of how much inflation pressure is now in the system. but it has become hard for doves to argue that the economy is still some way from full employment", he wrote.

The committee made no decisions regarding the balance sheet and agreed to renew the discussion at subsequent meetings.

"At the same time, several participants cautioned that upcoming elections in European Union countries posed both near-term and longer-term risks", the minutes said.

Concern about that possibility contributed to a selloff of stocks Wednesday afternoon after the minutes of the Fed's March meeting were released. Many economists have said they think rate increases will occur at the June and September meetings.

US stocks SPX, +0.56% pared gains after the release of the minutes, and the yields on government bonds TMUBMUSD10Y, +0.30% rose.

Among major United States indices, the Nasdaq fell the most at 0.6 per cent after earlier hitting an all-time intraday high earlier in the day.

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