Federal Reserve is broken into two camps about future interest rates moves, according to the Minutes of Federal Open Market Committee (FOMC), Jan 29-30, 2019.
One camp of ‘several’ officials raised a point that rate increase is needed if the inflation outcomes are higher than baseline forecast. However, another camp of ‘several’ officials argued that it would be only appropriate to raise the rate, if economy goes up, as expected.
Michael Materasso, Senior Vice President, Franklin Templeton’s Fixed Income Policy Committee said that he is expecting the interest rates hike to resume in late summer. He added that the Fed would pause for some meetings, but they are not tightening. They will also end the balance sheet runoff this year and will give themselves more flexibility in terms of raising rates.
Federal officials did support ending the runoff of central bank’s balance sheet while showing doubt over, whether they would raise the rates again in 2019.
The minutes also highlighted the dovish message; when FOMC said they would be ‘patient’ showing it had put rate hikes on hold, and were prepared to be flexible on reducing the balance sheet.
The shift occurred since the Great Depression, as the trade tensions escalated between China and the United States, and Trump rebuked officials for tightening the monetary policy.
Participants observed that if uncertainty decreased, the committee has to reassess the monetary policy as ‘patient’ and might then use different statement language.
Market Reactions after the Minutes Release
U.S. stocks fluctuated as the minutes released, but then settled on a higher point with S&P 500 index advancing by 0.2 percent.
Federal funds futures were changed with just three basis points of cuts, and the 10-year Treasury yield had gains of around 2.64 percent.
The minutes also said that there were participants who suggested that ‘It Was Not Yet Clear’ what adjustments to range will make the federal funds rate appropriate later in 2019.
Jerome Powell, Chairman of Federal Reserve, says that Fed will be ‘patient’ in deciding, how and when to adjust the policy in regard to the set of risks including trade negotiations, effect of five-week U.S. government shutdown, Brexit, and slowing growth in Europe and China.
With this, the FOMC also decided to leave the rate unchanged in a range of 2.25 percent to 2.5 percent.
While the officials were expecting inflation near 2 percent target, adopting a flexible and ‘patient’ approach was appropriate at this time as a way to manage risks, while evaluating the data, the minutes added.
Diane Swonk, American Economic Advisor and Chief Economist at Grant Thornton LLP, said the minutes also confirmed that the Fed speakers are convinced on the downside risks than the upside risks. She added that they are clearly in risk management mode.
Still, she also said that it should also be considered that the Fed minutes did not reveal the increased possibility that the Fed’s next move might be a rate cut.