WASHINGTON (MNI) – The following is the first part of excerpts from
the minutes of the April 26-27 meeting of the Federal Open Market
Committee in which nearly all participants indicated that the first step
toward normalization should be ceasing to reinvest payments of principal
on agency securities and, simultaneously or soon after, ceasing to
reinvest principal payments on Treasury securities:

The staff next gave a presentation on strategies for normalizing
the stance and conduct of monetary policy over time as the economy
strengthens. Normalizing the stance of policy would entail the
withdrawal of the current extraordinary degree of accommodation at the
appropriate time, while normalizing the conduct of policy would involve
draining the large volume of reserve balances in the banking system and
shrinking the overall size of the balance sheet, as well as returning
the SOMA to its historical composition of essentially only Treasury
securities.

The presentation noted a few key issues that the Committee would
need to address in deciding on its approach to normalization. The first
key issue was the extent to which the Committee would want to tighten
policy, at the appropriate time, by increasing short-term interest
rates, by decreasing its holdings of longer-term securities, or both.
Because the two policies would restrain economic activity by tightening
financial conditions, they could be combined in various ways to achieve
similar outcomes.

For example, in principle, the Committee could accomplish
essentially the same degree of monetary tightening by selling assets
sooner and faster but raising the target for the federal funds rate
later and more slowly, or by selling assets later and more slowly but
increasing the federal funds rate target sooner and faster.

The SOMA portfolio could be reduced by selling securities outright,
by ceasing the reinvestment of principal payments on its securities
holdings, or both. A second key issue was the extent to which the
Committee might choose to vary the pace of any asset sales it undertakes
in response to economic and financial conditions.

If it chose to make the pace of sales quite responsive to
conditions, the FOMC would be able to actively use two policy
instrumentsasset sales and the federal funds rate targetto pursue its
economic objectives, which could increase the scope and flexibility for
adjusting financial conditions.

In contrast, sales at a pace that varied less with changes in
economic and financial conditions and was preannounced and largely
predetermined would leave the federal funds rate target as the
Committee’s primary active policy instrument, which could result in
policy that is more straightforward for the Committee to calibrate and
to communicate. Finally, the staff presentation noted that the Committee
would need to decide if and when to use the tools that it has developed
to temporarily reduce reserve balancesreverse repurchase agreements and
term depositsin order to tighten the correspondence between any changes
in the interest rate the Federal Reserve pays on excess reserves and the
changes in the federal funds rate.

Meeting participants agreed on several principles that would guide
the Committee’s strategy for normalizing monetary policy. First, with
regard to the normalization of the stance of monetary policy, the pace
and sequencing of the policy steps would be driven by the Committee’s
monetary policy objectives for maximum employment and price stability.
Participants noted that the Committee’s decision to discuss the
appropriate strategy for normalizing the stance of policy at the current
meeting did not mean that the move toward such normalization would
necessarily begin soon.

Second, to normalize the conduct of monetary policy, it was agreed
that the size of the SOMA’s securities portfolio would be reduced over
the intermediate term to a level consistent with the implementation of
monetary policy through the management of the federal funds rate rather
than through variation in the size or composition of the Federal
Reserve’s balance sheet.

Third, over the intermediate term, the exit strategy would involve
returning the SOMA to holding essentially only Treasury securities in
order to minimize the extent to which the Federal Reserve portfolio
might affect the allocation of credit across sectors of the economy.
Such a shift was seen as requiring sales of agency securities at some
point. And fourth, asset sales would be implemented within a framework
that had been communicated to the public in advance, and at a pace that
potentially could be adjusted in response to changes in economic or
financial conditions.

In addition, nearly all participants indicated that the first step
toward normalization should be ceasing to reinvest payments of principal
on agency securities and, simultaneously or soon after, ceasing to
reinvest principal payments on Treasury securities.

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** Market News International Washington Bureau: 202-371-2121 **

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