Fed Offers More Clues About Interest Rate Pause
The Federal Reserve provided more clarity about what prompted officials in January to suddenly pause the Fed’s steady campaign of interest rate increases, citing a “sharper-than-expected slowdown” in global economic growth as well as uncertainty about continuing trade tensions, according to minutes of that meeting released on Wednesday.
While the Fed did not see any immediate threats to United States economic growth, the minutes show officials grew worried enough in late January about potential risks to the American economy, including slowing growth in China and Europe, trade tensions, a volatile stock market and a prolonged government shutdown. Those factors helped persuade the central bank to pause rate increases for the foreseeable future.
Still, the minutes show that “several” Fed officials believe it will be appropriate to raise rates again later this year, “if the economy evolved as they expected.”
The January meeting marked a departure by the Fed from what had been a slow and steady march toward higher rates and less stimulative monetary policy. The Fed’s policy statement released after its meeting dropped previous language that said “some further gradual increases” in interest rates would be warranted in the months to come.
The Fed said officials “pointed to a variety of considerations that supported a patient approach to monetary policy,” including the need for additional economic data, which would help policymakers better gauge business and consumer sentiment. The Fed also said participants saw “few risks” to pausing and that being patient would allow more time to determine the effect of President Trump’s trade war with China and other countries and the economic damage from the prolonged government shutdown, which had not been resolved at the time of the Fed’s January meeting.
“Information arriving in coming months could also shed light on the effects of the recent partial federal government shutdown on the U.S. economy and on the results of the budget negotiations occurring in the wake of the shutdown, including the possible implications for the path of fiscal policy,” the minutes said.
Officials worried in particular that investors did not have a clear picture of how the Fed planned to deal with the slimming of the bond portfolio it amassed in the wake of the financial crisis, as part of its effort to lower borrowing costs and boost the economy. They agreed that “it would be desirable to announce before too long a plan to stop reducing the Federal Reserve’s asset holdings later this year” and said the announcement “would provide more certainty about the process for completing the normalization of the size of the Federal Reserve’s balance sheet.”
Fed officials also acknowledged the volatility that had gripped equity markets after the Fed’s December rate hike. The Fed said that investors were appearing to interpret the Fed’s actions at its December meeting — when officials raised rates by a quarter of a percentage point — as “not fully appreciating the tightening of financial conditions and the associated downside risks to the U.S. economic outlook that had emerged since the fall.”
And the Fed noted that some investors were perceiving the Fed to be “insufficiently flexible in its approach to adjusting the path for the federal funds rate or the process for balance sheet normalization in light of those risks.”
The Fed chairman, Jerome H. Powell, said in a news conference after the January meeting that officials had concluded that recent economic developments — including slowing global growth, turmoil in financial markets and uncertainty over trade negotiations — had pushed the central bank to “a patient, wait-and-see approach regarding future policy changes.”
“We are now facing a somewhat contradictory picture of generally strong U.S. macroeconomic performance, alongside growing evidence of crosscurrents,” Mr. Powell said. “At such times, common sense risk management suggests patiently awaiting greater clarity.”
Markets celebrated that news, with a rally that has continued in the weeks since the meeting. Fed officials have said little in that time to dispel the notion that they will not raise rates again any time soon.
James Bullard, the president of the Federal Reserve Bank of St. Louis, suggested to reporters this month that the Fed had gone too far with rate increases last year and was thus likely to miss its 2 percent inflation target once again in 2019.
Mr. Trump has repeatedly criticized the Fed over the past year for raising interest rates, saying that he would prefer rates to stay low to fuel more economic growth. Many liberal economists share that view, and cheered the move to slow rate increases that was signaled in January.