Federal Reserve officials decided in late January to suspend their sustained campaign to raise interest rates, as the global economic outlook becomes less uncertain and financial markets fail to appreciate the Fed's willingness to do so. to change course if the economy weakened, according to the minutes of the meeting released Wednesday. .
Fed officials concluded that a pause posed "little risk" for a strong economy in which prices continued to rise at a moderate pace, according to the minutes. The Fed did not see an immediate threat to US economic expansion, but officials said they were sufficiently worried about potential risks – slowing growth in China and Europe, trade tensions, volatility stock markets and prolonged government closures – to delay rate hikes.
It is unclear whether the Fed will raise rates in 2019. The minutes reveal a divergence between Fed officials, with several saying that it would be appropriate to further increase rates. later this year "if the economy evolved as expected". Others were less eager to resume the increases, especially if inflation persisted. below the 2% target of the Fed.
James Bullard, president of the US Federal Reserve in St. Louis, told reporters this month that the Fed had gone too far with rate hikes last year. Other officials have announced in recent days that they are expecting an increase in rates, said Cleveland Bank Federal Reserve Chairman Loretta J. Mester in a speech delivered this week.
The markets found little news in the minutes. The S & P 500, which had been negative earlier in the day, rose slightly. Treasury bond yields have barely budged.
The January meeting was a departure by the Fed from a slow and steady march towards higher rates and a less stimulating monetary policy in a context of strengthening the economy. After five consecutive quarters of rate hikes, Fed officials left them unchanged in January, as expected. But they surprised the markets in the policy statement issued after the meeting, which had dropped the previous wording, according to which "further gradual increases" in interest rates would be warranted in the coming months.
This change seems to have been partly a correction of financial markets which, according to officials, became volatile in December, convinced that officials of the Fed did not worry enough about the economic uncertainty at home and abroad. abroad – or that they were willing to adopt a more stimulating policy. measures if these uncertainties turned into economic difficulties.
The Fed's communication at the end of its December meeting, during which officials raised rates by a quarter of a point, "would have been perceived by market players as n". not fully appreciating the tightening of the financial situation and the risks associated with the decline in the US economic outlook since the fall, "said the minutes.
Officials feared that investors would not have a clear idea of how the Fed was planning to manage the thinning of the bond portfolio he raised in the aftermath of the financial crisis. In addition to lowering interest rates to a near zero level, the Fed has been trying to upset the economy by buying large amounts of mortgage bonds and treasury securities, so to encourage investors to buy riskier assets, such as shares.
The Fed has slowly earned this $ 4 trillion portfolio by maturing up to $ 50 billion in bonds each month, but officials appeared to agree in January that the balance sheet should end this year .
Officials agreed that "it would be desirable to announce too early a plan to stop reducing the holdings of the Federal Reserve later this year" and said the announcement would give more certainty about the process to complete the normalization of the size of the Federal Reserve. " balance sheet."
The minutes also underscored how difficult it was for the Fed, which does not deal in plain language, to always communicate its plans effectively. At the January meeting, Fed officials said investors viewed the central bank as "insufficiently flexible" in both its rate-raising campaign and its run-off.
Fed officials tried to change these perceptions after the December and January meetings. At a news conference on Jan. 30, Fed Chairman Jerome H. Powell said recent economic developments (slowdown in global growth, turmoil in financial markets, and uncertainty in trade negotiations) have pushed the central bank to patient, wait and see the future policy changes. "
"We are now faced with a somewhat contradictory picture of the generally strong macroeconomic performance of the United States, along with growing evidence of cross currents," Powell said. "In such moments, common sense risk management suggests waiting patiently for greater clarity."
Curt Long, the chief economist of the National Association of Credit Unions provided by the federal government, said the report revealing the shift to a more "patient" attitude was "definitely a nod to the future". Eye to unstable markets ".
Greg McBride, chief financial analyst of Bankrate.com, was more direct: it is obvious that the Fed was shaken by the markets and sold, he wrote Wednesday.
The minutes show that Fed officials have found little inconvenience. They show that policymakers "highlighted a host of considerations for a patient approach to monetary policy," including the need for additional economic data, which would help policymakers better understand business sentiment. and consumers.
The Fed also felt that being patient would allow more time to determine the effects of President Trump's trade war with China and other countries and the economic damage caused by the prolonged closure of the government, which does not had not been resolved at the January meeting.
"The information received in the coming months could also shed light on the effects of the recent partial closure of the federal government on the US economy and on the results of post-closure budget negotiations, including possible implications. for the trajectory of fiscal policy. , Says the minutes.
The pause had the expected effect with investors, as markets celebrated this news with a rally that has continued since.
Other critics of the Fed's interest rate campaign also seem to have been satisfied. Mr. Trump – who has repeatedly criticized the Fed for raising interest rates – dined with Mr. Powell shortly after the meeting. Many liberal economists also welcomed the decision to slow rate hikes, saying it would help workers by continuing to support the labor market and potentially increasing wages.