Fed Minutes Signal Patience

Federal Reserve officials judged at their latest meeting that their patient approach to interest-rate change would be appropriate “for some time,” and many sided with Chairman Jerome Powell’s view that the recent dip in inflation was probably temporary.

“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,” according to minutes of the Federal Open Market Committee’s (FOMC’s) April 30–May 1 meeting, released Wednesday in Washington.

U.S. stocks remained lower and Treasuries held gains, as the minutes reinforced the message from Powell’s post-meeting press conference, at which he said the level of interest rates was appropriate for now and there wasn’t a strong case to move in either direction. The record also showed officials becoming more optimistic about the U.S. 2019 economic outlook before President Donald Trump’s decision to raise tariffs on Chinese imports. They also had a debate about the future composition of the bond portfolio.

Many participants viewed the recent easing in inflation “as likely to be transitory, and participants generally anticipated that a patient approach to policy adjustments was likely to be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the committee’s symmetric 2 percent objective,” the minutes said.

The Fed’s preferred gauge of price pressures, excluding food and energy, slowed to a 1.6 percent increase in the 12 months through March, despite solid economic growth and a tight labor market.

At the meeting, the FOMC left its benchmark policy rate unchanged, in a 2.25 percent to 2.5 percent target range, and reiterated its pledge to be“patient” in weighing future moves. The committee next gathers on June 18-19.

Fed officials received a staff presentation on two approaches to adjusting the maturity composition of the central bank’s portfolio. One approach would return the portfolio to a composition similar to outstanding Treasury securities, while another would result in a shorter-term maturity structure of three years or less.

Portfolio Discussion

The staff analysis showed that a move to the shorter-term portfolio “would put significant upward pressure on term premiums and imply that the path of the federal funds rate would need to be correspondingly lower to achieve the same macroeconomic outcomes as in the baseline outlook,” the minutes said.

In their discussion of a portfolio proportional to the Treasury market, “participants observed that moving to this target” of portfolio composition “would not be expected to have much effect on current staff estimates of term premiums and thus would likely not reduce the scope for lowering the target range for the federal funds rate target in response to adverse economic shocks.”

Several participants judged that the proportional approach would be “well-aligned with the committee’s previous statements that changes in the target range for the federal funds rate are the primary means by which the committee adjusts the stance of monetary policy.” At the same time, some of the debate focused on how much capacity each strategy would allow for adding economic stimulus through a maturity extension program.

Investors have been betting the Fed will cut interest rates later this year, partly on concern over inflation running persistently below its 2 percent target, which prices have done for most of the last seven years.

On the economic outlook, “many participants suggested that their own concerns from earlier in the year about downside risks from slowing global economic growth and the deterioration in financial conditions or similar concerns expressed by their business contacts had abated,” according to the minutes.

The country’s gross domestic product (GDP) expanded at a 3.2 percent annual pace in the first quarter, surpassing expectations, and unemployment hit a 49-year low in April. The U.S. expansion is on track to become the longest on record in July.

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