First Step
Talks on the exit were deeper. Almost all officials agreed that the "first step toward normalization" should be ceasing reinvestment of principal payments on mortgage debt that began in August, the FOMC said. A majority preferred to sell the Fed's securities after raising short-term interest rates, and most wanted to put asset sales on a preannounced schedule while using federal-funds rate increases as an "active tool."
Policy makers agreed that the Fed's securities portfolio, set to reach $2.6 trillion next month, would be shrunk "over the intermediate term" and return to "essentially only Treasury securities," the minutes said.
The minutes were the first to be released since Bernanke, 57, held his first regular press conference after the FOMC meeting ended April 27. The Fed released the quarterly economic projections of its governors and regional bank presidents the same day. The forecasts were previously disclosed with a three- week delay in the minutes.
Officials Divided
Officials were most divided in April over how and in what order to use asset sales and interest rates to tighten credit. Many of the policy makers who wanted to put sales on a preannounced path said the pace should be gradual and could still be adjusted based on the economic outlook, while several preferred to use the pace as a "key policy tool" that could be "varied actively."
A few policy makers said asset sales should precede any interest-rate increase, and a few others indicated both moves should "commence at the same time," the minutes said.
"They were just laying out the strategy but very clearly not moving toward implementation," said Carl Riccadonna, senior U.S. economist at Deutsche Bank Securities Inc. in New York. "There is not a lot of conviction on the strength of the economy as well as the upturn in inflation" in the minutes.
St. Louis Fed President James Bullard said any tightening campaign should begin by shrinking the Fed's balance sheet, which could be done "passively" by not reinvesting maturing mortgage-backed securities or by actual sales.
'Controversial And Undecided'
"Whether you would supplement that with actual sales is controversial and undecided at this point," Bullard said yesterday in an interview before release of the minutes. Interest-rate changes would represent "bringing out the big guns" and likely come later, he said. Bullard indicated he would favor shrinking assets "a fair amount" before raising rates.
When officials met in April, crude oil was trading close to its highest price since 2008. Inflation expectations, as measured by the breakeven rate for five-year Treasury Inflation Protected Securities, had climbed to 2.41 percentage points from 1.73 points at the end of 2010.
Bernanke took several questions about inflation at his press conference, saying that "ultimately, if inflation persists or if inflation expectations begin to move, then there's no substitute for action." He indicated that he wasn't concerned yet because "medium-term inflation expectations" had "not really moved very much."