Federal Reserve officials have started shifting in 2018. Should they?



Federal Reserve officials who have repeatedly told investors that the central bank won’t be slowing down its asset purchases anytime soon are starting to back off.

The policy-setting Federal Open Market Committee was expected to complete a gradual reduction of the central bank’s $4.5 trillion balance sheet “on or around the end of September,” said Esther George, president of the Kansas City Fed. But “we could be done sooner than that, if that were the choice, but the majority of the committee would not like that, and it is on their minds.”

The Fed last month said it will start reducing its bond holdings this year and last week raised interest rates for the second time since the 2007-2009 recession. Officials have repeatedly declined to announce a date or coordinate with the others at the ECB and BOJ for the same purpose.

The stance suggests that Fed policymakers are perhaps more nervous about inflation than some investors think. Policymakers this month emphasized a “gradual” approach to shrinking the balance sheet, opting not to move as fast as some traders were signaling. Since then the annual increase in bond yields has ticked higher, suggesting that traders have had the Fed’s words challenged.

Speaking to reporters after an event on Monday, George cited a report from a Fed bank that shows inflation expectations outside the U.S. rose in the two weeks ending on February 22.

“Our anticipation that the whole committee would not like that is perhaps overstated, but the Fed is eager to get the balance sheet down and we are monitoring inflation expectations,” George said. “I think our judgment is we are on track with our intentions and it is something we are mindful of.”

Goldman Sachs will host the primary dealers and the International Monetary Fund for an “America: A View from the Outside” symposium on March 6-7 at the White House. Speakers include JPMorgan Chase & Co. chairman and chief executive Jamie Dimon, BlackRock Inc. chief executive Larry Fink and former Senate Majority Leader Harry Reid.

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At the first symposium since 2009 held at George’s Central Kansas Credit Union in Emporia, Kansas, the former Fed governor, who retired in 2015, again cautioned against a dangerous rise in inflation. Fed Vice Chair Stanley Fischer, who also served as governor, and other participants at the Fed Bank of Kansas City’s annual meeting have also spoken to reporters about the issue.

George also said she thinks Federal Reserve Chairman Jerome Powell will seek to end asset purchases as soon as the end of 2018, avoiding a contentious battle with Treasury Secretary Steven Mnuchin over capital in the bailout fund, the Securities Investor Protection Corp.

“Chairman Powell has been very explicit that the rules, well, don’t apply to him, that he would prefer to start to exit this soon, and if that turns out to be more difficult than anticipated, I think he’ll be frustrated, but I don’t think that’s going to slow it down,” George said.

Should the Fed “slowly” decide to slow down purchases, “we should move a little less than we would if they were rushing to do so,” George said.

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