Minutes of the Fed’s May meeting suggested policy flexibility later in the year while Atlanta Fed chief Raphael Bostic floated the idea of a September rate-hike pause.
Fed Vice Chair Lael Brainard pushed back hard on that, telling CNBC on Thursday “it’s very hard to see the case for a pause,” while spelling out she wants a string of lower readings on monthly core inflation to give her confidence that policy is working.
Investors see a better-than-even chance the Fed will hike rates by 50 basis points in September, according to interest rate futures prices.
Just how shrinking the $8.9 trillion balance sheet interacts with markets and risk is another mystery.
“We need more of a framework around the balance sheet and financial conditions, and they have been slow to develop one,” said Julia Coronado, co-founder of MacroPolicy Perspectives LLC.
The challenge is that “for a given path of quantitative tightening the impact varies because it depends on how much risk there is in the world,” she said.
Fed Governor Christopher Waller told a Frankfurt audience on Monday that the planned annual $1 trillion runoff in the central bank’s holdings of Treasuries and mortgage-backed securities is probably equal to a 25 basis-point increase a year. But he warned that was only a rough judgment.
Bill Nelson, a former adviser to the Federal Open Market Committee, said one step officials could take would be to include a balance sheet forecast in their outlook since that is already implicit in their rate projections.
The balance sheet is now a “permanent part of the policy landscape,” said Nelson, who’s now chief economist at the Bank Policy Institute. “It is really not sound policy anymore to exclude FOMC participants’ views on the balance sheet” from their quarterly forecasts.
This article was provided by Bloomberg News.