Fed Reaffirms "Patient" Approach on Rates

Fed officials do not expect to make any changes to interest rate policy this year amid concerns about ongoing trade talks, Brexit negotiations and the possibility of a greater than expected economic slowdown in Europe and China, minutes of the March meeting showed. Policymakers also noted that their views of the appropriate target range for the federal funds rate could shift in either direction based on incoming data and other developments.

Excerpts from the minutes of the Federal Open Market Committee, March 19-20, 2019:

Participants commented on a number of risks associated with their outlook for economic activity. A few participants noted that there remained a high level of uncertainty associated with international developments, including ongoing trade talks and Brexit deliberations, al­though a couple of participants remarked that the risks of adverse outcomes were somewhat lower than in January. Other downside risks included the possibility of sizable spillovers from a greater-than-expected economic slowdown in Europe and China, persistence of the softness in spending, or a sharp falloff in fiscal stimulus. A few participants observed that an economic deterioration in the United States, if it occurred, might be amplified by significant debt service burdens for many firms. Participants also mentioned a number of upside risks regarding the outlook for economic activity, including outcomes in which various sources of uncertainty were resolved favorably, consumer and business sentiment rebounded sharply, or the recent strengthening in labor productivity growth signaled a pickup in the underlying trend. Upside risks to the outlook for inflation included the possibility that wage pressures could rise unexpectedly and lead to greater-than-expected price increases.

In their discussion of financial developments, participants observed that a good deal of the tightening over the latter part of last year in financial conditions had since been reversed; Federal Reserve communications since the beginning of this year were seen as an important contributor to the recent improvements in financial conditions. Participants noted that asset valuations had recovered strongly and also discussed the decline that had occurred in recent months in yields on longer-term Treasury securities. Several participants expressed concern that the yield curve for Treasury securities was now quite flat and noted that historical evidence suggested that an inverted yield curve could portend economic weakness; however, their discussion also noted that the unusually low level of term premiums in longer-term interest rates made historical relationships a less reliable basis for assessing the implications of the recent behavior of the yield curve. Several participants pointed to the increased debt issuance and higher leverage of nonfinancial corporations as a development that warranted continued monitoring.

With regard to the outlook for monetary policy beyond this meeting, a majority of participants expected that the evolution of the economic outlook and risks to the outlook would likely warrant leaving the target range unchanged for the remainder of the year. Several of these participants noted that the current target range for the federal funds rate was close to their estimates of its longer-run neutral level and foresaw economic growth continuing near its longer-run trend rate over the forecast period. Participants continued to emphasize that their decisions about the appropriate target range for the federal funds rate at coming meetings would depend on their ongoing assessments of the economic outlook, as informed by a wide range of data, as well as on how the risks to the outlook evolved. Several participants noted that their views of the appropriate target range for the federal funds rate could shift in either direction based on incoming data and other developments. Some participants indicated that if the economy evolved as they currently expected, with economic growth above its longer-run trend rate, they would likely judge it appropriate to raise the target range for the federal funds rate modestly later this year.

Fed Reaffirms "Patient" Approach on Rates

Federal Reserve | Joana Ferreira | joana.ferreira@tradingeconomics.com
4/10/2019 6:27:57 PM