Business Monday

Fed talk of tightening up and winding down

Janet Yellen, chair of the Federal Reserve, on the sidelines of the spring meetings of the IMF and World Bank in Washington, on April 21.
Janet Yellen, chair of the Federal Reserve, on the sidelines of the spring meetings of the IMF and World Bank in Washington, on April 21. Bloomberg

The Federal Reserve has made no secret of its desire to tighten credit. OK, no one at the Fed would claim it wants to make borrowing more expensive. Instead central bankers talk about removing accommodation. Over the past 15 months, the agency has hiked it’s short-term target interest rate three times as it works to bring the rate closer to what it considers a “normal” interest rate. And it has talked openly that it wants to continue.

But it’s not likely to tighten monetary policy when it meets in the week ahead.

It has gotten slightly more expensive for some consumers to borrow money, but consumer confidence remains high. New car loans and credit card interest rates have risen slightly while mortgage rates remain near their lowest level of the year.

Instead of action on interest rates, investors and borrowers should look for words from the Federal Reserve on Wednesday. President of the Federal Reserve Bank of Kansas City Esther George said two weeks ago, “I am encouraged by the start of the normalization process and want to see it continue.” She does not have a vote in this week’s decision, but she does have a voice.

While the bank aims to stay the course on interest rates, it increasingly has turned its attention to its balance sheet. This is Wall Street-speak for all the government and mortgage bonds the Fed bought to help support the economy in the years after the Great Recession. The central questions for the central bank are: How will it unwind those investments? And when will it start selling?

It has been cagier on this strategy than it’s steady-as-it-goes approach to interest rates.

Done together and done clumsily, tightening rates and winding down the balance sheet risk spooking investors. Speaking with a clear voice this week will help diminish that danger.

Financial journalist Tom Hudson hosts “The Sunshine Economy” on WLRN-FM in Miami. Follow him on Twitter @HudsonsView.

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