Federal Reserve officials remained firmly committed to a “patient” policy stance at their meeting earlier this month, saying rates likely will remain unchanged well into the future.
Minutes from the May 1-2 Federal Open Market Committee meeting also showed that members raised their expectations for full-year economic growth and said that earlier concerns they had about a slowdown had abated. Despite their general optimism, the committee held the line on interest rates, primarily citing a lack of inflation pressures that allow the central bank to watch how events unfold before making any further moves.
“Members observed that a patient approach to determining future adjustments to the target range for the federal funds rate would likely remain appropriate for some time, especially in an environment of moderate economic growth and muted inflation pressures, even if global economic and financial conditions continued to improve,” the meeting summary stated.
For the past several meetings, members had expressed concerns about slowing global growth, the messy Brexit negotiations and the U.S.-China trade impasse.
However, the minutes from the most recent meeting showed a more upbeat tone. “A number of participants observed that some of the risks and uncertainties that had surrounded their outlooks earlier in the year had moderated, including those related to the global economic outlook, Brexit, and trade negotiations,” the minutes said.
“That said, these and other sources of uncertainty remained. In light of global economic and financial developments as well as muted inflation pressures, participants generally agreed that a patient approach to determining future adjustments to the target range for the federal funds rate remained appropriate.”
The meeting ended three days before President Donald Trump intensified the trade war with China by accusing Beijing of reneging on a deal. The White House later raised tariffs on China on May 10 and China announced a retaliation three days later.
Minutes show Fed comfortable where it is
After initially indicating that two rate hikes were likely in 2019, Fed officials earlier this year pivoted away from a tighter stance and now forecast no moves in either direction.
However, markets are pricing in at least one cut before the end of the year. In addition, President Donald Trump has pushed the Fed to lower rates, saying a cut of as much as a full percentage point would be appropriate.
The minutes, though, pointed to a Fed that feels comfortable both with policy as well as the rate of growth.
Pressures from the U.S.-China trade war garnered only brief mention as part of a battery of potentially “significant negative” threats to growth, largely mitigated by the corresponding upside potential from a strong labor market, upbeat consumer sentiment and remaining stimulus from the 2017 tax cuts.
“Participants continued to view sustained expansion of economic activity, with strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes,” the minutes said.
There even was some push for higher rates. The minutes noted “a few” members saying that if the economy continued to progress, the Fed would need “to firm” its policy to keep inflation in check. However, others worried about lower inflation expectations that showed less tightness in the labor market than the 3.6% unemployment rate might indicate.
Inflation has been a vexing issue for policymakers, with the central bank consistently running below its stated goal.
Chairman Jerome Powell said after this month’s meeting that he viewed the lower price pressures as “transient,” and the minutes indicated that his fellow officials agree.
Fed blames transitory factors for low inflation
The minutes noted that members attributed the low inflation readings to “idiosyncratic factors” such as sharp drops in apparel costs and from portfolio management services, the latter a delayed impact from the fourth-quarter stock market washout in 2018. Such transitory factors, the minutes noted, had been a principal cause of low inflation for “the last couple of years.”
Officials also said they expect the first-quarter slowdown in housing spending to be “temporary” as consumer confidence recently has taken a solid uptick.
The Fed is holding its benchmark overnight funds rate in a target range of 2.25% to 2.5%. The rate had ticked to the upper end of the range prior to the meeting. That in turn prompted the committee to lower the interest it pays on bank reserves, used as a guidepost for the funds rate, to 2.35%. Since then, the funds rate has ticked lower but still remains near the upper end of the range.
The meeting featured a discussion on why the rate has risen. Fed officials attributed the move to various factors, including elevated repo rates and increased demand in the funds market due to banks needing to meet liquidity coverage ratios.
Members also discussed the composition of the Fed’s $4 trillion balance sheet, primarily mulling over the duration of bonds it holds. The committee has been moving toward reducing duration, but members said they have time before making any firm commitments.
The minutes noted that a shorter-duration portfolio could keep the funds rate lower and give the Fed less maneuverability when the next downturn hits.
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