Fed meeting’s minutes show talk of paring bond holdings

WASHINGTON — Federal Reserve officials last month discussed the possibility of reducing their enormous portfolio of bond holdings later this year, sooner than many investors have been expecting.

The Fed’s bond holdings have kept downward pressure on interest rates. If its policy committee chose to start reducing those holdings, even at a likely gradual pace, it could lead eventually to higher rates on many consumer and business loans.

Concern about that possibility contributed to a selloff of stocks Wednesday afternoon after the minutes of the Fed’s March meeting were released.

The minutes showed that Fed officials received a staff briefing on managing its $4.5 trillion bond portfolio. That portfolio has risen four-fold since the financial crisis erupted in 2008 as the Fed has taken extraordinary steps to keep long-term rates low to support economic growth.

No decisions about the bond holdings were made at last month’s meeting, at which the Fed announced a modest increase in its benchmark short-term rate. But the minutes indicated a general view among Fed officials that if the economy remained solid as expected, a change in their policy of keeping the holdings unchanged “would likely be appropriate later this year.”

“The FOMC minutes were clear that officials are contemplating beginning to address the balance sheet,” said Win Thin, an economist at Brown Brothers Harriman.

The minutes said one approach for reducing the holdings that was discussed would be to suspend the reinvestment of at least some of the holdings of Treasury bonds and mortgage-backed securities as they mature. The Fed has been reinvesting those maturing bonds to keep from shrinking its holdings and thereby exerting upward pressure on long-term rates.