Fed Minutes Reveal Caution on Rates Missing From Statement

(Bloomberg) -- Minutes of the Federal Reserve’s December meeting revealed policy makers took a more cautious approach to further rate increases than their statement indicated.

“Many participants expressed the view that, especially in an environment of muted inflation pressures, the committee could afford to be patient about further policy firming,’’ the central bank said in minutes of its Dec. 18-19 policy meeting released Wednesday in Washington.

The vote to hike rates was unanimous but the minutes showed “a few participants” favored no change. The minutes showed the committee was attentive to recent financial-market volatility and risks to the outlook.

“Participants expressed that recent developments, including the volatility in financial markets and the increased concerns about global growth, made the appropriate extent and timing of future policy firming less clear than earlier,” the minutes said.

Officials signaled that further gradual increases in the policy rate were likely, though several participants said that it might be appropriate “over upcoming meetings to remove forward guidance entirely.” They suggested replacing it with language emphasizing “the data-dependent nature” of monetary-policy decisions.

‘Limited Amount’

The meeting was the most significant of Jerome Powell’s chairmanship so far. Officials raised rates and projected two more hikes in 2019, ignoring President Donald Trump’s demands for a halt and steep losses in the stock market, which deepened following their decision.

The minutes showed that officials voting at the meeting included language referring to “some further gradual” increases to indicate that they “judged that a relatively limited amount of additional tightening likely would be appropriate.”

Last month became the worst December for U.S. stocks since the Great Depression, with the rout continuing after Bloomberg News reported that Trump had discussed firing Powell. There was no direct reference to Trump in the minutes.

Officials agreed that policy was not on a pre-set path. “If incoming information prompted meaningful reassessments of the economic outlook and attendant risks, either to the upside or the downside, their policy outlook would change,” the minutes said.

Balance of Risks

Participants discussed five distinct downside risks to the outlook, including: a sharper-than-expected decline in global growth; a faster fading of fiscal stimulus; heightened trade tensions; further tightening of financial conditions; and a greater-than-expected negative impact from monetary policy tightening so far.

For upside risks, participants noted that the effects of stimulus could be larger than expected, that uncertainties around global growth and trade tensions could be resolved favorably, while citing conditions that could lead to stronger inflationary pressures.

“In general, participants agreed that risks to the outlook appeared roughly balanced, although some noted that downside risks may have increased of late,” the minutes said.

U.S. central bankers forecast above-trend growth for 2019 and that unemployment will fall further.

‘Listening Sensitively’

Since the meeting, Fed officials have assured investors that their outlook for higher rates depends on the economy performing as expected.

Powell said Jan. 4 he was “listening sensitively to the message that markets are sending” about downside risks. The dovish tone of his comments, plus a strong December payroll report, helped stocks rally 3.4 percent on the day.

U.S. central bankers held another wide-ranging discussion on their balance sheet without committing to a strategy. They discussed the possibility of ending portfolio redemptions with “a relatively high level of reserves” and also the possibility of “very gradual” mortgage-backed securities sales once the portfolio hit a more normal level. They also debated the best maturity profile for the portfolio, with several participants leaning toward a balance sheet with shorter maturities.

Some investors have blamed the shrinking balance sheet for causing turbulence in financial markets. Trump also appeared to refer to the runoff in a Dec. 18 tweet in which he urged the central bank to “Stop with the 50 B’s. Feel the market.’’

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