UPDATE 2-Dovish Fed suggests asset sales a distant prospect

* Fed mulls asset sales, but likely to wait a long time

* Some concern evident about European ripple effect

* Economic projections upgraded, inflation seen too low
(Recasts; adds analyst comments, detail)

By Pedro da Costa and Mark Felsenthal

WASHINGTON, May 19 (BestGrowthStock) – The Federal Reserve on
Wednesday indicated it was unlikely to sell mortgage debt
anytime soon as it offered a first outline of how it might
eventually begin unwinding emergency asset purchases conducted
during the financial crisis.

Minutes of the Fed’s last policy-setting meeting on April
27-28 published on Thursday also offered no hints of imminent
monetary tightening, despite upward revisions to the central
bank’s growth forecasts.

“It seems like there still is overwhelming support for
maintaining a zero interest rate structure,” said Dan Egan,
president of the Massachusetts Credit Union League, in
Marlborough, Massachusetts.

In reaction to the worst financial crisis since the Great
Depression, the Fed slashed interest rates to near zero. It
also bought more than $1.4 trillion in mortgage-related
securities in an effort to drive down mortgage costs and
support the battered housing market.

Fed officials agreed to sell those assets at some point,
but showed they were in no rush, particularly given the
still-fragile state of the U.S. housing sector.

“Most participants favored deferring asset sales for some
time,” the minutes said.

The minutes reflected the Fed’s thinking before a worsening
of the European debt crisis, which has taken a toll on U.S.
financial markets and prompted a reopening of a key emergency
lending agreement — foreign exchange swaps — with other
central banks.

MORE UPBEAT

The Fed’s quarterly “central tendency” forecasts showed
greater optimism on the growth outlook among policy makers, who
predicted gross domestic product would rise around 3.2 percent
to 3.7 percent this year. In January, officials estimated the
economy would grow between 2.8 percent and 3.5 percent.

Despite the predictions of stronger growth, the minutes
indicated the Fed does not see inflation as a near-term risk,
with gains in consumer prices outside food and energy expected
to hover between 0.9 percent and 1.2 percent this year.
[FED/FCASTS]

If anything, inflation was beginning to look too low.

“Most members projected that economic slack would continue
to be quite elevated for some time, with inflation remaining
below rates that would be consistent in the longer run with the
Federal Reserve’s dual objectives,” the minutes said, referring
to the central bank’s mandate to foster maximum sustainable
employment and price stability.

Economists’ forecasts for when the Fed might embark on a
tightening campaign vary widely. Some see higher interest rates
as early as the third quarter of this year, while others
believe the Fed will hold off until the end of 2011. Europe’s
troubles have strengthened the case for remaining on hold,
driving some economists to push back their rate hike
forecasts.

“Europe’s problem adds to the desire on their part to stay
on the sidelines with short-term rates,” said Paul Ballew,
chief economist at Nationwide in Columbus, Ohio.

U.S. consumer prices outside food and energy, a measure
favored by the central bank as a benchmark for policy, rose
just 0.9 percent in the year to April, the smallest gain since
1966.

The Fed saw the unemployment rate, currently at 9.9
percent, falling somewhat over the course of the year but
remaining at historically elevated levels for the foreseeable
future.

SKETCHING OUT ASSET SALES

The minutes contained the most detailed discussion yet of
the possibility of selling assets and reflected differing
opinions on the ideal course of action.

A majority of members said they would rather wait until the
Fed begins raising interest rates before any assets are sold.

Others preferred making an announcement sometime soon that
would commit the Fed to future sales, to be scheduled
independently from any potential increases in the benchmark
federal funds rate.

“A few” thought it would be wise to begin selling assets
soon, the minutes said.

There was also some disagreement as to the optimal pace of
sales, with a small minority arguing that divesting mortgages
at a rapid clip would minimize the risk that the Fed’s expanded
balance sheet would spark an unwanted rise in inflation
expectations.

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UPDATE 2-Dovish Fed suggests asset sales a distant prospect