WASHINGTON — The Federal Reserve will begin shrinking the enormous portfolio of bonds that it amassed after the 2008 financial crisis to try to sustain a frail economy. The move reflects a strengthened economy and could mean higher rates on mortgages and other loans over time.
The Fed announced Wednesday that it will let a small portion of its $4.5 trillion balance sheet mature without being replaced, starting in October with reductions of $10 billion a month and gradually rising over the next year to $50 billion a month.
The central bank left its key short-term rate unchanged but hinted at one more hike this year — most likely in December. The Fed policymakers’ updated economic forecasts show an expectation for three more rate increases in 2018.
The Fed’s policymaking committee approved its action on a 9-0 vote after ending its latest meeting.
Stocks turned lower after the announcement before finishing mixed. Bond yields rose, reflecting expectations of higher rates.
John Silvia, chief economist at Wells Fargo, said some investors appeared surprised that the Fed still expects to raise rates by December. With Hurricanes Harvey and Irma clouding some economic data — temporarily raising gas prices, likely restraining hiring and potentially depressing growth in the July-September quarter — some analysts assumed the Fed wouldn’t have enough information by December to assess whether the economy had rebounded from the storms.
“A lot of people were thinking (the Fed) would pass in December,” Silvia said.
At a news conference, Chair Janet Yellen said the Fed’s two rate hikes this year and its decision to begin reducing its bond holdings were signs of a solid economy and job market.
“The basic message here is U.S. economic performance has been good,” Yellen told reporters.
Yellen also said the Fed still believes that persistently low inflation — below the Fed’s 2 percent target rate for four years — is temporary. She said several factors have held inflation down: A job market still healing from the Great Recession, lower energy prices and a strong dollar, which has reduced the costs of imports.
She said the Fed would adjust its policymaking if it thought the causes of low inflation had become permanent.
Under the plan the Fed announced, it will start to allow a slight $10 billion in holdings to roll off the balance sheet each month — $6 billion in Treasurys and $4 billion in mortgage bonds. That figure would inch up by $10 billion each quarter until it reaches $50 billion in monthly reductions in October 2018. After that, the monthly reductions will remain steady.