Fed weighing when to start selling off trillions in bonds

Last Updated Jul 5, 2017 4:01 PM EDT

WASHINGTON - The Federal Reserve is figuring out when to start unloading much of its $4.5 trillion in bond holdings, a major turning point for an economy still healing from the 2008 financial crisis.

Some Fed officials want to announce the beginning of the process "within a couple of months," according to minutes of the U.S. central bank's June meeting. Others pushed for more time to first see how the broader U.S. economy fares during the second half of 2017. 

What Fed officials all agreed upon in June was to publicly unveil its plan to gradually reduce the portfolio of bonds that build up after the Great Recession -- part of an effort to make long-term borrowing more affordable and spur growth. Economists with IHS Markit expect the Fed to start shrinking its balance sheet at its September 19-20 policy meeting. 

The Fed voted in June to raise short-term rates by a quarter point to a range of 1 to 1.25 percent, the third quarter in a row the bank has lifted rates.

A move to start putting the central bank's finances in order could be complicated if the economy doesn't respond as policy makers expect. Inflation, in particular, has proved difficult to nudge closer to the Fed's 2 percent target, while in the first three months of the year the economy grew at a rate of only 1.4 percent.  

The slow start to the year has led some economists to caution against additional interest rate hikes this year. The debate within the the Fed about how fast to normalize monetary policy, including selling off bonds, was reflected in the latest account of its June policy meeting. 

Members of the Federal Open Market Committee – the Fed's rate-setting panel – "generally reiterated" their support for continuing to gradually raise rates, according to the minutes. But some participants said they were "less comfortable" with the pace of tightening.

The Fed expects to lift rates once more this year and three times in 2018.

"Fed members went back and forth on the state of the economy, with some agreeing that the drop in the unemployment rate is tinder for eventual inflation while others were less worried," said Peter Boockvar, chief market analyst with The Lindsey Group, in a client note. 

The nation's unemployment rate fell in June to 4.3 percent, the lowest level since 2001.