Fed Minutes: Interest Rates to Remain Steady for ‘Some Time’

The minutes re-emphasized the Fed’s patience while echoing the message from Powell’s post-meeting press conference, when he mentioned that many of the downside risks to the economy had “moderated somewhat.” “Members observed that a patient approach to determining future adjustments to the target range for the federal funds rate would likely remain appropriate for some time.”
James Hyerczyk
U.S. Federal Reserve FOMC

The minutes from the U.S. Federal Reserve’s May monetary policy meeting showed policymakers remained firmly committed to a “patient” policy approach, stating interest rates likely will remain unchanged well into the future.

The minutes from the May 1-2 Federal Open Market Committee (FOMC) meeting also showed policymakers raised their expectations for full-year economic growth and said that earlier concerns they had about a slowdown had diminished.

Despite their general optimism, the FOMC held the line on interest rates, primarily citing muted inflation that allow the central bank to watch how events unfold before making any further moves.

“Members observed that a patient approach to determining future adjustments to the target range for the federal funds rate would likely remain appropriate for some time, especially in an environment of moderate economic growth and muted inflation pressures, even if global economic and financial conditions continued to improve,” the meeting summary stated.

The minutes also showed a more upbeat tone despite concerns about slowing global growth, the volatile Brexit negotiations, U.S.-Iran sabre rattling and the lack of progress in U.S.-China trade talks.

“A number of participants observed that some of the risks and uncertainties that had surrounded their outlooks earlier in the year had moderated, including those related to the global economic outlook, Brexit, and trade negotiations,” the minutes said.

“That said, these and other sources of uncertainty remained. In light of global economic and financial developments as well as muted inflation pressures, participants generally agreed that a patient approach to determining future adjustments to the target range for the federal funds rate remained appropriate.”

Economic uncertainty from the U.S.-China trade war garnered only brief mention as part of a slew of potentially “significant negative” threats to growth. The Fed feels that any threats would be mitigated by the upside potential of the strong labor market, upbeat consumer sentiment and the lingering positive effects from the 2017 tax cuts.

“Participants continued to view sustained expansion of economic activity, with strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes,” the minutes said.

The minutes also noted “a few” members saying that if the economy continued to move forward, central bank policymakers would need “to firm” its policy to keep inflation in check. However, some policymakers expressed concern about lower inflation expectations that showed less tightness in the labor market than the 3.6% unemployment rate might indicate.

The minutes also showed that the FOMC attributed the low inflation readings to “idiosyncratic factors”. Such transitory factors, the minutes noted, had been the main cause of low inflation for “the last couple of years.”

Summary

The minutes re-emphasized the Fed’s patience while echoing the message from Powell’s post-meeting press conference, when he mentioned that many of the downside risks to the economy had “moderated somewhat.”

The minutes indicate that the Fed has set a very high bar for either a rate cut or a rate hike. There is going to have to be significant deterioration in growth and a notable dip in inflation that’s not due to transitory factors to cut rates. Furthermore, policymakers are not likely to raise rates unless they see a really sharp spike in growth or inflation.

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