Fed Officials See Gradual Exit Strategy, Minutes Show
Federal Reserve officials laid out a broad blueprint for very gradually tightening financial conditions when the economy is healthy enough to bear it.</br></br>Minutes of the Fed's April 26-27 meeting, released Wednesday with the normal three-week lag, showed Fed officials had an extensive discussion about what is known as their exit strategy from an era of easy credit. But the Federal Open Market Committee minutes noted the discussion didn't mean that any moves "would necessarily begin soon." Many analysts believe it could take months or even years for the Fed to start raising interest rates.</br></br>In normal times this wouldn't require much debate. The Fed would simply raise its benchmark short-term interest rate, known as the federal funds rate, to tighten credit, slow growth and pull back inflation. Because of the unusual steps it took during and after the financial crisis, its exit from easy-money policies this time around will be more complicated. It must substantially reduce a $2.4 trillion portfolio of mortgage and Treasury securities.</br></br>The first step, as Fed chairman Ben Bernanke indicated in a first-ever news conference following the April meeting, will be a decision to allow the mortgage portfolio to start shrinking on its own--by allowing the securities to mature without reinvesting the proceeds in Treasurys, as it has been doing.</br></br>At the same time or shortly thereafter it will do the same thing with some of its long-term Treasury bonds. At some point, the Fed will slowly and steadily sell its mortgage holdings. Officials were inclined to hold off on active securities sales until after they had taken other steps, including raising the short-term fed funds rate, the minutes showed.