Fed mulls options for raising interest rates

Washington: US Federal Reserve policy makers have begun focusing on how to manage monetary policy as they move toward raising interest rates next year and ending their six-year-old crisis stance.

The minutes of the Federal Open Market Committee's (FOMC) April 29-30 meeting showed on Wednesday the policy makers launching into how they should prepare the ground for lifting the benchmark federal funds rate from near zero, expected in mid-2015.

'the committee's discussion of this topic was undertaken as part of prudent planning and did not imply that normalisation would necessarily begin sometime soon, the minutes said.

Because the Federal Reserve has not previously tightened the stance of policy while holding a large balance sheet, most participants judged that the committee should consider a range of options and be prepared to adjust the mix of its policy tools as warranted.

Fed officials discussed several approaches to policy when they raise short-term interest rates, but decided further study was needed.

Among the policy tools they looked were a fixed-rate overnight reverse repo facility, the sale and repurchase of securities, and the term deposit facility, which offers banks an interest rate on deposits, helping the Fed mop up excess bank reserves.

The Fed's key federal funds rate has been between zero and 0.25 per cent since December 2008, part of the central bank's unprecedented loose monetary policy aimed at helping the economy recover from the severe 2008-2009 recession.

The FOMC officials also looked at controlling the level of short-term interest rates once they rise, 'during a period when the Federal Reserve will have a very large balance sheet resulting from massive asset purchases to tamp down long-term interest rates.

The Fed's balance sheet has swollen to $4.3 trillion (Dh15.8 trillion). In December, the FOMC decided to begin tapering the $85 billion a month quantitative-easing programme. At the April meeting, tapered by $10 billion for the fourth time, taking QE to $45 billion in May.

Bounceback questioned

The minutes showed the FOMC policy makers generally saw little change in the outlook for the gradually recovering economy since their March 18-19 meeting.

After a sluggish first quarter, blamed in part on unusually severe winter weather, there were signs of stronger growth suggesting the economy had returned to a trajectory of moderate growth.

Policy makers expected that, with appropriate monetary policy support, economic activity would expand at a moderate pace and labour market conditions would continue to improve gradually.

They continued to view the risks to the outlook for the economy, as well as the labour market, where unemployment remains high, as nearly balanced.

However, some participants remarked that it was too early to confirm that the bounceback in economic activity would put the economy on a path of sustained above-trend economic growth.

Though indicators on the labour market were mixed, they showed further improvement but the unemployment rate still 'remained elevated when the policy makers met, the official jobless rate was 6.7 per cent.

In April, the jobless rate plunged to 6.3 per cent, the lowest level since September 2008, due mainly to a sharp decline in the active labour force.

Inflation continued to run below the Fed's two per cent target but policy makers expect over time it would return to its measure of price stability.

But there was concern among Fed officials about the stall in the housing market recovery and foreign pressures on the US economy.

A number of participants pointed to possible sources of downside risk to growth, including a persistent slowdown in the housing sector or potential international developments, such as a further slowing of growth in China or an increase in geopolitical tensions regarding Russia and Ukraine.

Source: gulfnews.com

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