WASHINGTON–Newly released minutes from the Federal Reserve’s most recent meeting offer additional insights into new thinking around the direction of rates, as well as its plans for the nearly $4 trillion in bonds it currently holds.
Many forecasters, including those within credit unions, had been predicting the Federal Reserve would move at least two times in 2019 to raise rates, but the Fed’s statements have led many to dial back those forecasts.
As CUToday.info reported earlier, the Federal Open Markets Committee surprised many when it indicated following its January meeting that various market conditions may warrant leaving rates untouched. Now, in the minutes released from that meeting, it noted participants had pointed to “patient approach to monetary policy at this juncture as an appropriate step in managing various risks and uncertainties in the outlook.” The minutes make clear some members of the FOMC have concerns about the U.S. and world economies and how long both can maintain current levels of growth. Members of the FOMC also indicated they do not believe inflation will rise as quickly as some had forecast.
Members added that holding the federal funds rate in a target range of 2.25% to 2.5% "posed few risks at this point." Previously, the FOMC had expressed some concerns that keeping rates low for too long would spur inflation.
Federal Bank of Cleveland President Loretta Mester recently said she would consider medium-run forecasts “before making any further adjustments in the policy rate,” while New York Fed President John Williams said he does not believe interest rates will need to be raised again unless new economic growth signals or inflation data justify such a move.
Reducing Bond Portfolio
While credit unions have paid particular attention to the FOMC’s policy on rates, much of the market was more interested in the Fed’s position on winding down the bonds on the central bank's balance sheet before the end of 2019.
"Almost all participants thought that it would be desirable to announce before too long a plan to stop reducing the Federal Reserve's asset holdings later this year,” the minutes state. “Such an announcement would provide more certainty about the process for completing the normalization of the size of the Federal Reserve's balance sheet.”
The Federal Reserve has $3.8 trillion in bonds on its balance sheet, which it has been reducing since October 2017.
“Participants observed that, although the target range for the federal funds rate was the Committee’s primary means of adjusting the stance of policy, the balance sheet normalization process should proceed in a way that supports the achievement of the Federal Reserve’s dual-mandate goals of maximum employment and stable prices,” the minutes state. “Consistent with this principle, participants agreed that it was important to be flexible in managing the process of balance sheet normalization, and that it would be appropriate to adjust the details of balance sheet normalization plans in light of economic and financial developments if necessary to achieve the Committee’s macroeconomic objectives.”