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Federal Reserve officials decided in late January to pause their steady campaign to raise interest rates as the global economic outlook became less certain and financial markets failed to appreciate the Fed’s willingness to shift if the economy weakened, according to the minutes of that meeting released Wednesday.
Fed officials concluded that a pause posed “few risks” for a strong economy in which prices continued to increase at a subdued rate, the minutes show. The Fed did not see any immediate threats to the United States’ economic expansion, but officials indicated they were worried enough about potential risks — including slowing growth in China and Europe, trade tensions, a volatile stock market and a prolonged government shutdown — to postpone rate increases.
Whether the Fed will raise rates at all in 2019 remains unclear. The minutes show a divergence among Fed officials, with “several” saying they believed it would be appropriate to raise rates again later this year “if the economy evolved as they expected.” Others were less eager to resume the increases, particularly if inflation remained below the Fed’s 2 percent target.
James Bullard, president of the Federal Reserve Bank of St. Louis, suggested to reporters this month that the Fed had gone too far with rate increases last year. Other officials have said in recent days they expect rate increases to resume, a view the Federal Reserve Bank of Cleveland president, Loretta J. Mester, expressed in a speech this week.
Markets found little new information in the minutes. The S&P 500, which had been negative earlier in the day, rose slightly. Treasury bond yields barely budged.
The January meeting was a departure by the Fed from what had been a slow and steady march toward higher rates and less stimulative monetary policy amid a strengthening economy. After five consecutive quarters of raising rates, Fed officials left them unchanged in January, as expected. But they surprised markets in the policy statement released after the meeting, which dropped previous language that said “some further gradual increases” in interest rates would be warranted in the months to come.
That shift appears to have been, in part, a corrective note to financial markets, which officials believed had turned volatile in December on the belief that Fed officials were not sufficiently worried about economic uncertainty at home and abroad — or willing to adopt more stimulative policy measures if those uncertainties turned into economic drags.
The Fed’s communication after its December meeting, when officials raised rates by a quarter of a percentage point, “were reportedly perceived by market participants as not fully appreciating the tightening of financial conditions and the associated downside risks to the U.S. economic outlook that had emerged since the fall,” the minutes said.
Officials worried in particular that investors did not have a clear picture of how the Fed planned to deal with the slimming of the bond portfolio it amassed in the wake of the financial crisis. In addition to lowering interest rates to near zero, the Fed tried to goose the economy by purchasing large quantities of mortgage bonds and Treasury securities, as a way to encourage investors to buy riskier assets, like stocks.
The Fed has slowly been winnowing that $4 trillion portfolio by allowing up to $50 billion in bonds to mature each month, but officials appeared to agree in January that the balance sheet runoff should end this year.
Officials agreed that “it would be desirable to announce before too long a plan to stop reducing the Federal Reserve’s asset holdings later this year” and said the announcement “would provide more certainty about the process for completing the normalization of the size of the Federal Reserve’s balance sheet.”
The minutes also highlighted just how hard it is for the Fed, which does not traffic in plain language, to always effectively communicate its plans. At the January meeting, Fed officials noted that investors were perceiving the central bank to be “insufficiently flexible” in both its rate increase campaign and its balance sheet runoff.
Fed officials tried to change those perceptions after both the December and January meetings. Fed Chairman Jerome Powell said in a news conference Jan. 30 that officials had concluded that recent economic developments — including slowing global growth, turmoil in financial markets and uncertainty over trade negotiations — had pushed the central bank to “a patient, wait-and-see approach regarding future policy changes.”
“We are now facing a somewhat contradictory picture of generally strong U.S. macroeconomic performance, alongside growing evidence of crosscurrents,” Powell said. “At such times, common sense risk management suggests patiently awaiting greater clarity.”
Curt Long, chief economist at the National Association of Federally-Insured Credit Unions, said the minutes revealing the shift to a more “patient” stance were “certainly a nod to jittery markets.”
Greg McBride, chief financial analyst for Bankrate.com, was more blunt: “It’s evident the Fed was rattled by the markets and caved,” he wrote Wednesday.
The minutes show Fed officials saw little downside to the shift. They show officials “pointed to a variety of considerations that supported a patient approach to monetary policy,” including the need for additional economic data, which would help policymakers better gauge business and consumer sentiment.
The Fed also believed that being patient would allow more time to determine the effect of President Donald Trump’s trade war with China and other countries and the economic damage from the prolonged government shutdown, which had not been resolved at the time of the January meeting.