Fed Officials Saw Rates on Hold, With an Eye on Downside Risk

(Bloomberg) -- Federal Reserve officials said their monetary policy was likely to remain appropriate “for a time” even amid what they saw as persistent downside risks.

“Participants regarded the current stance of monetary policy as likely to remain appropriate” as long as incoming reports affirmed their outlook, minutes of the Dec. 10-11 Federal Open Market Committee released Friday in Washington showed. “Nevertheless, global developments, related to both persistent uncertainty regarding international trade and weakness in economic growth abroad, continued to pose some risks to the outlook.”

Fed officials left interest rates unchanged at their final 2019 meeting following three straight cuts. They also signaled policy would be on hold through 2020, which would keep the central bank on the sidelines during a U.S. presidential election year.

Participants saw sustained economic expansion, labor market strength, and inflation near their 2% goal as the most likely outcomes, in part because of their monetary policy support. A number said the economy was showing resilience amid global headwinds.

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Fed officials worried that inflation continued to fall short of their 2% target, the minutes said. “Various participants were concerned that indicators were suggesting that the level of longer-term inflation expectations was too low,” the record said.

Policy makers were also optimistic about the labor market, with participants remarking on indications that the unemployment rate could fall further without putting pressure on inflation.

“A number of participants noted that the labor force participation rate could rise further still,” the minutes said.

Thirteen of 17 officials forecast leaving rates on hold in 2020, according to projections released at the last meeting, with four penciling in a quarter-point hike. A majority forecast at least one increase in 2021 and 2022. Not a single official forecast a rate cut in the next three years.

Officials also focused on their recent steps to calm money markets following strains in September that sent overnight rates surging. Among topics mentioned were “the potential role of a standing repo facility in an ample-reserves regime,” the minutes said.

Read More: Fed Wins Repo Battle, But War to Control Rates Drags On

The Fed provided $256 billion of temporary liquidity via open market repurchase operations over the end of the year to avoid a cash crunch. The final operation of 2019 saw just $25.6 billion pumped into the system, compared with a maximum available offering of $150 billion. It plans repo operations through January.

The minutes also discussed highlights from the system open market account manager’s report to the committee:

• The Fed could consider expanding security purchases for reserve management to include coupon-bearing Treasury securities with a short time to maturity if necessary to ease liquidity constraints in the Treasury bill market.
• The manager discussed expectations to gradually transition away from active repo operations next year as bill purchases supply a larger base of reserves, though some repos might be needed through April, when tax payments reduce reserves.
• It may be appropriate at some point to adjust rates on excess reserves and on overnight reverse repurchase agreements.

The Fed is currently buying $60 billion of Treasury bills a month to boost bank reserves and meet longer-run liquidity demand.

--With assistance from Chris Middleton and Vince Golle.

To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net

To contact the editors responsible for this story: Alister Bull at abull7@bloomberg.net, Jeff Kearns, Scott Lanman

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