Fed minutes: Officials back reducing bond holdings this year

The Canadian dollar hit its strongest since mid-April at C$1.3389 per USA dollar after the Bank of Canada kept interest rates unchanged and gave a more upbeat assessment of the economy than some investors had expected.

Fed officials said planned spending by President Donald Trump’s administration could boost the economy more than now forecast, although the details and timing of the projects “remain highly uncertain”.

Most analysts expect two more rate increases this year, likely at the next meeting June 13-14, and again in September.

The Fed also moved toward a consensus on a proposal to start gradually shrinking its US$4.5 trillion in holdings of Treasury and mortgage securities later in the year, according to minutes of the gathering released Wednesday. The caps would initially be set at low levels and then be raised every three months, over a set period of time, to their fully phased-in levels. The goal would be to minimize the effect of the bond sales on loan rates paid by consumers and businesses.

Fed funds rate futures are pricing in about a 75 percent chance that the Fed will raise rates next month, moving down from more than 80 percent earlier this week.

Almost all policymakers expressed a favorable view of the approach, which was seen as consistent with the intention to reduce the Fed’s securities holdings in a gradual and predictable manner.

Still, Raymond Stone warned in a research note that if losses were to materialize, they “could become a political “hot potato” inviting unwanted congressional intrusion, compromising Fed independence”. “It has the momentum to surpass the $1.1300 mark and we could see the rise continue toward $1.1500”, said Daisuke Karakama, market economist at Mizuho Bank in Tokyo.

The minutes of the Federal Reserve’s May policy meeting that were released on Wednesday indicated that the United States central bank remained on track for more rate increases this year.

The minutes did not spell out what officials meant by “soon”.

Fed officials, however, made clear their baseline expectation was for a return to stronger economic growth.

For seven years, the Fed left its key short-term rate at a record low near zero in an effort to support the economy’s recovery from the 2007-2009 recession, the worst downturn since the 1930s.

Data on Wednesday showed home resales fell more than expected in April as a tight supply boosted prices and sidelined prospective buyers.

The Canadian dollar eased back 0.16 cents to 74.41 cents US early Thursday.

The discussion of winding down the Fed’s balance sheet was also framed in the minutes in terms of the wider group of policymakers.

“That’s good. Even better (because it leaves no room for speculations as what the Fed will or will not do), the minutes also provided greater clarification on what the Fed’s doing about its ‘reinvestment policy”.