According to The Federal Reserve last month , the economy is gradually improving and it would reverse policies take on during the recession that pumped billions of dollars into the economy. Some members said the Fed might need to start increasing interest rates this year to guard against price rises. Any effort to tighten credit would lead to higher rates on some mortgages, credit cards and other customer loans. Policymakers however didn’t commit to taking any action at the April 26-27 meeting, the minutes of the meeting released Wednesday indicate they agreed that if the economy continued its steady growth, the Fed would need to pull back on its enormous incentive programs and take steps to avert customer prices from getting out of control.
The representatives generally agreed that the first step should be for the central bank to stop reinvesting money earned off its holdings of mortgages and Treasury securities. A mainstream of participants said the best method for tapering credit would be to lift the federal funds rate, which is now at a record-low near zero. The federal funds rate is the interest banks pay each other on overnight loans. Most Fed officials said they preferred raising that rate before selling mortgage securities from the Fed’s immense portfolio.
Some members thought the Fed would need to start indicating to investors that interest rates would need to rise. A few members believed the Fed might need to boost its key interest rate or start selling some of the assets in its portfolio this year. The minutes don’t identify what the individual Fed policymakers were saying.
The Fed’s exit policy is likely to be more intricate than ever before because of the unusual steps the Fed took during and after the recession to prop up the economy. The Fed’s balance sheet has nearly tripled in the past three years to roughly $2.7 trillion. To counter the 2008 financial crisis and the recession, the Fed launched programs to buy billions of dollars’ worth of mortgage securities and Treasury debt.
Those programs have helped drive down rates on mortgages and other loans and boosted stock prices. A lot Fed representative said they favored a steady process of selling off its mortgage securities. The goal would be for the Fed’s portfolio to consist entirely of Treasury securities within five years of the start of those sales.
Fed officials didn’t agree on when the central bank would launch its exit policy. Fed representative have predicted that a surge in oil prices would be temporary and would not lead to runaway inflation. Crude has fallen about 11.5 percent since April, when a weak dollar and a rash of international crises pushed oil to two-year highs.