WASHINGTON — US Federal Reserve officials at their last meeting agreed that their current patient approach to setting monetary policy could remain in place “for some time,” a further sign policy makers see little need to change rates in either direction.
“Members observed that a patient approach… would likely remain appropriate for some time,” with no need to raise or lower the target interest rate from its current level of between 2.25% and 2.5%, the Fed on Wednesday reported in the minutes of the central bank’s April 30-May 1 meeting.
Recent weak inflation was viewed by “many participants… as likely to be transitory,” while risks to financial markets and the global economy had appeared to ease — a judgment rendered before the Trump administration imposed higher tariffs on Chinese goods and took other steps that intensified trade tensions.
Still, Dallas Federal Reserve president Robert Kaplan in a Wednesday interview on Fox Business said that to move rates higher or lower, “I would need to see something compelling… We are basically at the right policy setting.”
Analysts saw little new in the minutes regarding Fed policy, although some noted that policy makers’ views may have changed in the intervening weeks since US President Donald Trump took a harder trade line with China.
“The re-escalation in the trade tension between US and China since the meeting, that could change Fed’s outlook a lot,” said Eric Stein, co-director of the global income group at Eaton Vance Management in Boston.
Yields on US Treasury securities briefly rose following the release of the minutes while US stock markets and the dollar pared losses through midafternoon.
The minutes showed the Fed delving deep into the mechanics of how they could best structure their holdings of several trillion dollars of securities to battle a future economic downturn.
“Many participants,” the minutes noted, saw advantage in stocking the portfolio with shorter-term securities, which could, in a crisis, be swapped for long-term bonds in hopes of lowering the longer-term interest rates that impact home mortgage rates, business borrowing, and a number of forms of credit important for the economy.
But a staff report on various balance sheet strategies posed a dilemma. If the Fed skewed its bond holdings toward shorter-term Treasuries, it might come at the cost of higher longer-term rates now — in effect tightening credit conditions for many borrowers.
That would “imply that the path of the federal funds rate would need to be correspondingly lower to achieve the same macroeconomic outcomes.” In the scenarios being discussed that would, ironically, mean the Fed would have less room to cut rates in a crisis — and be more likely to have to rely on its balance sheet tools to boost the economy.
No decisions were made.
Though the support for a “patient” approach to rate hikes was widespread, according to the minutes, “a few” participants did warn of the risk of higher inflation and a possible need for higher rates given the low rates of unemployment.
“Several” warned, on the other hand, that inflation could weaken.
But overall “it appears as though the Fed is exactly where they want to be and don’t have to lean one way or the other,” said Art Hogan, chief market strategist at National Securities in New York.
The Fed meets next on June 18-19, when it will update economic projections. While Fed officials have largely downplayed the Sino-US trade dispute as a short-term problem, they have of late begun discussing the risks if the tariffs and trade tensions persist and begin to reshape global supply chains and pricing. In comments in Hong Kong overnight, St. Louis Fed president James Bullard said that a failure to resolve the trade dispute in the near term could change global trading patterns, and is another reason for the Fed “to tread carefully.” — Reuters