Members of the Federal Open Market Committee are bracing for the inevitable shift away from the expansionary monetary policies implemented post-recession, according to minutes of the committee’s April meeting. The FOMC said it is prepared to cut the central bank’s growing balance sheet, while also moving the federal funds rate away from near zero. While it’s still unclear when this transition will occur, the minutes of the latest meeting show Fed officials discussing the balance they will have to strike between increases in short-term interest rates and reductions of holdings in longer-term securities. “Because the two policies would restrain economic activity by tightening financial conditions, they could be combined in various ways to achieve similar outcomes,” according to the minutes of the meeting. “For example, in principle, the committee could accomplish essentially the same degree of monetary tightening by selling assets sooner and faster but raising the target for the federal funds rate later and more slowly, or by selling assets later and more slowly but increasing the federal funds rate target sooner and faster.” Either way, the Fed signaled a new reality where the FOMC will gradually phase out programs like QE2 – a quantitative easing program that had the Fed reinvesting proceeds of maturing debt into long-term Treasurys. That program began in November and is expected to end mid-summer. “The pace and sequencing of the policy steps (moving away from expansionary measures) will be driven by the committee’s monetary policy objectives for maximum employment and price stability,” according to the minutes of the meeting. After reviewing the minutes, analysts with Capital Economics estimated it will take more than a year before the Fed actually tightens its policies. “A few participants ‘thought that economic conditions might warrant action … later this year.’ On the other hand, some participants were concerned that an early exit could unnecessarily damp the ongoing economic recovery. In short, aside from a few hawks, the majority doesn’t anticipate tightening policy until next year at the earliest, which is the view already priced into fed funds futures,” Capital Economics analysts said. Write to: Kerri Panchuk.

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