Looming fight over debt limit has some officials considering a delay of the third rate increase until after September, or start to wind-down the balance sheet sooner
The Federal Reserve building in Washington, D.C. Photo: kevin lamarque/Reuters
Federal Reserve officials are likely to raise short-term interest rates at their meeting in two weeks and announce their framework for shrinking a $4.5 trillion portfolio of bonds and other assets later this year.
Clarity on these two matters has allowed them to focus on two other looming decisions this year—whether to raise rates again in September and when to start reducing the portfolio, or balance sheet.
One source of uncertainty emerging in recent weeks is the possibility that Congress and the White House might have trouble reaching agreement in September to raise the federal debt limit and approve government funding for the year beginning Oct. 1.
Until recently, many officials thought they would probably want to lift rates in September and start the balance-sheet process later in the year. But now some say they may want to rethink the timing of those plans if a rancorous budget fight threatens to roil markets.
For now, though, Fed policy is on a smooth track. At their May meeting, officials forged consensus around a strategy for slowly and predictably reducing the balance sheet of Treasury securities and mortgages by allowing a small number of assets to mature every month without reinvesting any proceeds, according to interviews and their public statements.
The Fed would start by allowing a small amount of net maturities per month, and allow that amount to rise each quarter. It has not yet outlined those amounts. Officials are unlikely to say how big the portfolio will be at the end of the process until it is further along.
The agreement on this approach could be announced as soon as June 14, after its two-day policy meeting.