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Fed Worried About Risks Posed by Its Loose Policy, Minutes Show

06 July 2017

Some Fed officials want to announce the beginning of the process "within a couple of months", according to minutes of the US central bank's June meeting.

While he was the only member of the Federal Open Market Committee to dissent, the minutes noted that "a few" Fed officials who supported the rate increase cautioned that the weakness of inflation might require the Fed to raise rates more slowly going forward.

IG analyst Joshua Mahony said: "With the big European data out of the way, the focus now shifts to the United States, where the FOMC minutes will bring rate expectations to the forefront of investors' minds".

Last month's 8-1 vote to lift the benchmark interest rate another quarter percentage point, its second this year, signaled the Fed's confidence in a growing USA economy and the eventual inflationary effects of low unemployment.

"This program, which would gradually reduce the Federal Reserve's securities holdings by decreasing reinvestment of principal payments from those securities, was described in an addendum to the Committee's Policy Normalization Principles and Plans to be released after this meeting".

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The minutes recorded policymakers' deliberations at last month's meeting, when the central bank raised interest rates by a quarter of a point to a range of one-to-1.25%.

"The information reviewed for the June 13-14 meeting showed that labor market conditions continued to strengthen in recent months and suggested that real gross domestic product (GDP) was expanding at a faster pace in the second quarter than in the first quarter", the minutes read.

Other officials believed that making a decision later in the year would give the Fed more time to evaluate the outlook for economic activity and inflation. Meanwhile, U.S. officials will soon confront the challenge of raising the debt ceiling to continue to fund the government.

There is increasing evidence that financial conditions will play an increasingly important role at the next few meetings and there was a discussion at the June meeting as to why financial conditions had not tightened following the increases in the Fed Funds rate. Investors saw a almost 20 percent chance of another rate hike in September, and a 60 percent chance of another rate hike or two by December.

Some members were also concerned that there could be a build-up of risks to financial stability. Those figures would rise in increments over a year until they reached $30 billion a month in Treasurys and $20 billion in mortgage bonds. But Ms. Yellen downplayed the extent of the Fed's concerns at a news conference after the Fed's June meeting.

Fed Worried About Risks Posed by Its Loose Policy, Minutes Show