Fed minutes: Officials back reducing bond holdings this year

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USA stocks were little changed in early trading on Wednesday as investors awaited Federal Reserve minutes of its May meeting that could cement the chances of a rate hike next month.

The minutes of the Fed's March meeting, which were released April 5, indicated that policymakers believed the time had almost come to begin shrinking the central bank's bloated balance sheet, which would act as a monetary tightening.

The Federal Reserve will nearly certainly take steps to start reducing its $4.5 trillion balance sheet later this year.

The process comes as the Fed embarks on a gradual path toward normalizing interest rates.

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".

The central bank raised rates in March and December, amid a wave of optimism in the early days of Trump's term, with his promises of tax cuts, deregulation and big infrastructure spending.

The next major phase of monetary policy tightening - the timing and approach to the unwinding of the Fed's balance sheet (also referred to as altering the "reinvestment" policy) - has been of high interest to the market and was also touched upon in the statement. Unless there's a material change in the USA economic outlook or the Fed's plan, its balance-sheet reductions won't be particularly disruptive.

The Fed minutes also sent the dollar index tumbling 0.32 percent, though it held near 6-1/2-month lows.

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"Fed rate hikes coupled with this balance sheet reduction plan, we really don't know how its going to play out", said Greg Peters, senior investment officer for PGIM Fixed Income.

Fed officials, however, made clear their baseline expectation was for a return to stronger economic growth. But the discussion of the outlook showed widening divisions among Fed officials, with "several" seeing a possible need to start raising rates at a faster pace, while a few others thought a slower pace was more advisable. A tightening labor market and historically low mortgage rates have helped the housing market recovery.

The Fed raised rates for the first time in December 2015 and has followed with two more modest increases, in December previous year and then in March.

The U.S. dollar index fell to session lows after the Fed minutes.

The securities on the Fed's balance sheet were bought during the quantitative easing programme of bond-buying.

The Fed's $4.5 trillion balance sheet represents a five-fold increase from where it stood in the summer of 2008 before the financial crisis hit, sending the country into a deep recession.

"Absent a material slowdown in the economy, Federal Reserve officials, acknowledging support from strengthening global growth, appear poised to stay on track toward interest rate normalization", said Quincy Krosby, chief market strategist at Prudential Financial (NYSE: PJH - news), based in Newark, New Jersey.

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