Fed Officials Talked Exit Tools in April With Asset Sales Absent

Federal Reserve officials last month discussed a range of tools they could use to control short-term interest rates once they decide on the first increase in borrowing costs since 2006. Missing from the list: asset sales.

Among the tools were overnight reverse repurchase agreements, the term deposit facility, and interest paid on the excess reserves that banks hold at the Fed, according to minutes of their April 29-30 meeting released today.

While no decisions were made after officials heard a staff presentation on the tools, “participants generally agreed that starting to consider the options for normalization at this meeting was prudent.”

“The Fed is trying to decide on its strategy well ahead of the time when it will actually use it,” said Dean Maki, chief U.S. economist at Barclays Plc in New York. “They are very careful to note that just because they are talking about it doesn’t mean it’s coming soon.”

The benchmark lending rate has been held in a range of zero to 0.25 percent since December 2008. Fed officials forecast in March that the rate would be 1 percent at the end of 2015 and 2.25 percent at the end of 2016, according to the median estimates.

Participants at the April meeting agreed that “early communication” of their exit strategy “would enhance the clarity and credibility of monetary policy,” the minutes showed.

The Fed has pushed up assets on its balance sheet to a record $4.34 trillion as it engaged in three rounds of large-scale purchases of Treasuries and housing debt intended to push down long-term interest rates and spur the economy. The latest round of purchases is likely to end this fall, according to Chair Janet Yellen.

Maturing Securities

New York Fed President William Dudley said in a speech yesterday that the balance sheet should start to shrink only after the first increase in the federal funds rate as Treasury securities mature and mortgages are pre-paid.

Then-Fed Chairman Ben S. Bernanke said in a June 2013 press conference that “a strong majority” of Fed officials preferred not to sell mortgage-backed securities as part of their exit from record stimulus.

Securitized mortgages were the first instrument Bernanke chose to expand the portfolio when he started quantitative easing in November 2008 in an effort to boost a credit-starved housing market. That decision was unusual because he rarely used executive powers to act outside of a Federal Open Market Committee meeting.

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