May 22, 2019
By Howard Schneider and Jason Lange
WASHINGTON (Reuters) – U.S. 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 policymakers see little need to change rates in either direction.
According to minutes of the Fed’s April 30-May 1 meeting, officials also delved deep into the mechanics of how they could best structure their holdings of several trillion dollars of securities to battle a future economic downturn.
They quickly hit a dilemma as they discussed what could be a several years plan to structure perhaps $3.5 to $4 trillion of assets to either reflect existing market holdings of U.S. Treasuries, or to be focused on shorter-term maturities.
“Many participants” said they thought it might help for the Fed to gradually load up on short-term securities now, so that they could be traded for longer-term securities and bring down long-term rates as a way to better stimulate the economy if needed in the future.
However staff presentations noted that would come at the potential cost of higher longer-term rates now, “and 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.
The Fed’s last meeting came before the Trump administration increased tariffs on Chinese goods and intensified global trade tensions further with restrictions on Chinese telecom giant Huawei.
At that point, with U.S. growth continuing, inflation “muted,” and some global risks appearing to have eased, “members observed that a patient approach…would likely remain appropriate for some time…even if global economic and financial conditions continued to improve.”
While “a few” participants warned of inflation risks and a possible need for higher rates, and “several” warned inflation could weaken, minutes of the policy meeting reflected a committee poised to bide its time until economic data shift convincingly in one direction or the other. The committee held its target interest rate steady at that meeting in a range of between 2.25 and 2.5 percent
Consistent with Fed chair Jerome Powell’s press conference after the meeting, participants observed “at least part of the recent softness in inflation could be attributed to idiosyncratic factors.”
(Reporting by Howard Schneider and Jason Lange, Editing by Andrea Ricci)