Balancing act for Fed debating changes

When analysts and observers of the USA economy discuss the Federal Reserve's policy moves, they often point to the federal funds rate-the bank-to-bank lending rate that's closely followed by interest rates on mortgages, credit card debt and other loans, which the Fed raises to rein the economy in during times of steady growth.

April 5 USA stocks turned negative on Wednesday afternoon after meeting minutes showed that the Federal Reserve sees a change in its bond investment policy later this year, which reversed a rally after a strong jobs report earlier in the day.

"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", said the minutes of the Fed's latest monetary policy meeting which was held on March 14 and 15.

"Participants continued to underscore the considerable uncertainty about the timing and nature of potential changes to fiscal policy", the minutes said. "Participants generally preferred to phase out or cease reinvestments of both Treasury securities and agency mortgage-backed securities", said the minutes.

The Fed, chaired by Janet Yellen, bought Treasury and mortgage-backed bonds on a hitherto unprecedented scale in the wake of the financial crisis to help to keep interest rates low and to encourage job creation and economic growth. Finally reversing this policy itself could have the effect of an interest rate hike, accounting for Wall Street's dimmed exuberance on Wednesday.

Before the release of the minutes, Fed funds futures put the odds of a rate hike in June at more than 63.4 per cent.

Stock markets have surged in recent months on expectations that the Trump White House will introduce measures to stimulate the economy, including tax cuts for individuals and corporations and programs that boost infrastructure spending. Members of the Federal Open Market Committee also said meaningful fiscal stimulus from the Trump administration would not be felt until 2018.




The minutes also showed some disagreement over the near-term dangers of inflation, a subject that had divided Fed members in mid-2016. The Fed's dual mandates are to achieve maximum employment and moderate inflation.

"No firm decisions have yet been made but it seems pretty clear now that reinvestment will be slowed". Reducing the balance sheet could have the same impact on the markets as a rate hike.

However, officials pointed to upcoming elections in Europe, which could trigger the exit of more countries from the Eurozone, as a possible risk to the global economy.

Read: What Will Happen At The US Federal Reserve's Next Meeting?

Uncertainty around them was substantial, the Fed said.

The S&P 500 was down 0.31%, the Dow Jones Industrial Average fell 0.20%, and the Nasdaq fell 0.58%.

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