A possible tradeoff between opposing camps at the U.S. Federal Reserve could bring about an earlier-than-expected interest rate rise while keeping the U.S. central bank’s balance sheet larger for longer.
Comments from officials anxious to tighten monetary policy as well as from those who want it to remain as accommodative as possible suggest they may balance the timing of a rate rise against when the central bank’s massive securities portfolio should shrink.
Policymakers struck a similar compromise in December when they twinned their decision to start trimming bond purchases with an even stronger promise to keep rates near zero well into the future. The purchases are expected to end later this year.
To continue dialing back the Fed’s aggressive policy accommodation, officials must next raise rates and stop reinvesting proceeds from maturing Treasuries and mortgage bonds the central bank holds. The timing of those moves could have big consequences for the economy and global financial markets.
Even though a move on either front is unlikely until the first half of 2015 at the earliest, officials have already begun to strategize over the best way forward. Those discussions are likely to be front and center when Fed officials next meet on June 17-18.
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