Fed Is Unlikely to Raise Rates in Next Months, Minutes Show -- Update

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01/10/2019 | 12:29 am


By Nick Timiraos



WASHINGTON -- Federal Reserve officials signaled they are unlikely to raise interest rates for at least a few months while they assess the impact of recent market volatility on the U.S. economy.



Officials were already growing more cautious about their policy path when they agreed to raise rates last month, according to minutes of their Dec. 18-19 meeting. The minutes, released Wednesday, indicated officials thought they could be close to ending their recent series of rate increases.



Their decision to raise rates last month by a quarter percentage point to a range between 2.25% and 2.5% was unanimous and followed sustained calls from President Trump to keep rates steady.



The minutes revealed that Fed officials thought concerns over slowing global growth and trade tensions that roiled markets in the run-up to the meeting made "the extent and timing of further policy firming less clear than earlier."



Also on Wednesday, a pair of influential officials who had supported raising rates four times last year -- as the Fed did -- signaled little urgency to lift them again soon, even though they said they still expected the economy to perform well enough this year to eventually justify slightly higher borrowing costs.



The Fed "can wait for greater clarity before adjusting policy," Boston Fed President Eric Rosengren said in a speech Wednesday. "There should be no particular bias towards raising or lowering rates until the data more clearly indicate the path for domestic and international economic growth."



Chicago Fed President Charles Evans, also in a speech Wednesday, said muted inflation allowed the Fed to "wait and carefully take stock of the incoming data and other developments" before determining how to adjust the current policy.



Both men are voting members this year on the Fed's rate-setting committee, which next meets Jan. 29-30.



St. Louis Fed President James Bullard, another voting member this year, said in an interview Tuesday the central bank was "bordering on going too far" with rate increases. Mr. Bullard, who wasn't on the rate-setting panel last year, hasn't advocated for raising rates in the past two years.



While last month's rate increase was largely expected, stocks sold off and bond yields fell in the hours and days after Fed Chairman Jerome Powell presented a confident outlook in a postmeeting press conference that conveyed to some investors a greater bias toward rate increases than they anticipated.



Markets have traded higher since last Friday, buoyed by a strong December hiring report and Mr. Powell's more market-friendly tone during a question-and-answer session in Atlanta.



Mr. Powell said Friday that markets were placing greater weight than Fed officials were on risks to the outlook that haven't yet shown up substantially in U.S. economic data. But he added, "we will be prepared to adjust policy quickly and flexibly and use all of our tools to support the economy should that be appropriate."



Recent Fed speeches and the minutes show "everybody is singing from the same song sheet," said Julia Coronado, founder of MacroPolicy Perspectives LLC, a New York economics advisory firm.



"Everyone is thinking, 'You know what? We've done a lot. We're OK with a pause,'" she said.



Indeed, while all Fed officials indicated last month they expected the economy to slow from its 3% growth rate last year, several have said in recent days they believe the U.S. will avoid the sharper pullback implied by recent market drops.



At the same time, they aren't as eager as they were last year to raise their benchmark rate because it is now closer to a neutral setting intended to neither spur nor slow growth.



After December's rate increase, officials believed that "a relatively limited amount of tightening would be appropriate" based on current data, according to Wednesday's minutes.



Officials tried to communicate this view by adding to their postmeeting statement the word "some" to qualify their judgment that "further gradual increases" in their benchmark rate would be warranted.



The minutes offered another sign that the end of the Fed's rate rises could be near because they said officials were ready to shed entirely the language about further gradual increases. The Fed did this in mid-2006, when it ended its last rate-increase cycle.



Between the Fed's meetings in November and December, worries about the global economy weighed on stock and bond markets, raising borrowing costs for businesses. Meanwhile, inflation has shown few signs of running past the Fed's 2% target.



In December, "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 minutes said.



Separately, the minutes showed the Fed made more progress but reached no final decisions around how and when it will stop shrinking its $4.1 trillion portfolio of bonds and other assets. The minutes indicate officials aren't looking to slow the winddown as part of their policy stance, a change advocated in recent weeks by some prominent investors and Mr. Trump.



Instead, the minutes show the debate over how to manage the runoff of the central bank's Treasury and mortgage securities is being guided by learning more about the demand for the Fed's liabilities, which include currency in circulation and bank deposits that are known as reserves.



The Fed's portfolio grew to $4.5 trillion in 2014, and officials agreed to begin shrinking the holdings in 2017. At that time, officials said they wanted to move the portfolio to mostly Treasury holdings.



Wednesday's minutes show officials discussed whether they could eventually sell small amounts of mortgage securities and what the mix of Treasury securities should look like once the portfolio stops shrinking.



--Michael S. Derby contributed to this article.



Write to Nick Timiraos at nick.timiraos@wsj.com





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