Fed: Portfolio cuts 'relatively soon,' December rate hike less certain

Members of the Federal Reserve’s policy-setting committee expect to start the clock on shrinking its $4.5 trillion portfolio “relatively soon,” according to minutes of their July meeting.

Economists widely believe the Fed will announce plans to reduce its balance sheet in September, and July’s minutes, released on Wednesday, reaffirmed that central bank officials are ready to move forward. The central bank has already disclosed that it will begin by dropping as much as $6 billion in government bonds and $4 billion in mortgage-backed securities every month.

According to the minutes, participants generally agreed that it was “appropriate to signal that implementation of the program likely would begin relatively soon, absent significant adverse developments in the economy or in financial markets.”

There were some participants who wanted to kick off a balance sheet reduction at the July meeting, though most opted to stay the current course.

On the issue of rate hikes, Fed members were more divided. Some Fed watchers say the central bank could choose to wait until 2018 before raising interest rates, despite predictions for a December hike. Delaying the move could allow the Fed to further evaluate the pace of inflation, which has trailed the Fed’s 2% target.

While most members saw the outlook for the U.S. economy and labor market as little changed, others “expressed concern about the recent decline in inflation.” Those participants also said the Fed can be patient and wait until it becomes clear that recent low readings on inflation were merely a hiccup.

Low inflation “causes indigestion for the nation’s central bankers,” said Mark Hamrick, senior economic analyst at Bankrate.com. “It stands in the way of their long-term hope to boost interest rates and get on with the business of shrinking the $4 trillion balance sheet. Even so, it appears we’ll hear about the planned timing of so-called quantitative tightening at the September FOMC meeting.”

Charles Evans, president of the Federal Reserve Bank of Chicago, recently indicated that a potential rate hike in December is not set in stone. New York Federal Reserve President William Dudley said he would support a December increase to the federal funds rate if economic conditions remain strong.

Fed members reiterated their intent to move “gradually” as they normalize interest rates. The federal funds rate currently sits at 1% to 1.25%.