The Fed plans to raise rates ‘fairly soon’

This article first appeared at Business Insider:

The Federal Reserve plans to raise interest rates “fairly soon” if the economy remains on track, according to minutes from the January 31/February 1 policy meeting released Wednesday.

At that meeting, the Federal Open Market Committee voted to leave its benchmark interest rate unchanged, just as markets had expected.

The Fed would like to see more progress towards its target of 2% inflation, and even more evidence that the labor market is improving.

Its staff’s assessment of the economy in Wednesday’s minutes included several references to “downside risks” to the economy. However, the meeting was held before data releases on jobs and inflation early in February that crushed estimates.

The next rate hike is unlikely to be in March even after recent hawkish commentary from several Fed officials including Chair Janet Yellen. It has raised rates from zero twice since the end of the recession but is patiently normalizing rates because of continuing risks to the economy including the uncertainty of policy outcomes from the Trump administration.

According to Bloomberg, futures traders priced in a 38% chance of a rate increase at the March 14-15 meeting, and a 62.7% chance of one at the gathering in June after the minutes crossed.

There’s renewed interest in how the Fed plans to shrink its balance sheet. After the recession, the Fed launched bond-buying programs to help keep interest rates low and expanded its holdings to about $4.5 trillion as a result.

“The shrinking of the balance sheet may start in the not too distant future,” said Neel Kashkari, the Minneapolis Fed president, on Tuesday. Yellen was similarly vague during congressional testimony on Valentine’s Day, saying the Fed would gradually unwind its balance sheet when the process of normalizing rates is well underway.

“It is clear that policymakers have not reached a consensus on the particulars of the Fed’s reinvestment policy at this point,” said Deutsche Bank economists in a note on Tuesday. Economists at BNP Paribas forecast that the Fed will start trimming its balance sheet once rates are in the 1%-1.5% range; the benchmark fed funds rate is in a range of 0.50%-0.75%.