Skip to main content

U.S. Federal Reserve policy-makers on Wednesday gave little sense of how long their “patient” stance on U.S. interest-rate policy would last, and while promising “before too long” a plan for their US$4-trillion balance sheet, left unclear what that plan would entail.

For now, policy-makers see little risk to leaving rates alone to assess the impact of a global slowdown and the Fed’s rate hikes to date, according to the Fed’s minutes from their Jan. 29-30 meeting, released on Wednesday.

“Many participants suggested that it was not yet clear what adjustments to the target range for the federal funds rate may be appropriate later this year,” the minutes said.

But although “several” participants thought a rate increase would be necessary only if inflation unexpectedly surged, “several other participants indicated that, if the economy evolved as they expected, they would view it as appropriate to raise the target range for the federal funds rate later this year.”

The U.S. central bank caught markets off guard last month by suspending a three-year campaign to raise interest rates, saying it would be patient about making any adjustments to its target range for short-term interest rates, now at between 2.25 per cent and 2.5 per cent.

The surprisingly dovish decision came amid mounting headwinds to U.S. growth, including slowing Chinese and European economies and waning stimulus from the 2018 U.S. tax cuts.

A raft of Fed policy-makers, speaking since the Fed’s January pledge of patience, have insisted the economy is in a good place.

But doubts have remained, with traders in U.S. interest-rate futures placing increasing bets that the Fed will need to ease policy by early next year to counter a downturn.

The Fed also signalled it may slow or end reductions to its US$4-trillion balance sheet. This was built up in the wake of the 2007-09 recession but policy-makers began trimming its bond holdings in the final months of 2017.

Two Fed policy-makers said in recent weeks the balance sheet runoff could end this year.

The minutes released on Wednesday show Fed policy-makers are inching toward a decision on the balance sheet.

“Almost all participants thought that it would be desirable to announce before too long a plan to stop reducing the Federal Reserve’s asset holdings later this year,” the minutes said.

It was unclear if the Fed meant the sentence to suggest that the runoff, currently capped at US$50-billion a month, would actually end this year.

Bob Miller, head of U.S. multisector fixed income at BlackRock Inc, said in a note he is now expecting a balance sheet plan from the Fed by the May meeting minutes, a decision on the matter by June and a halt to the Fed’s runoff by October, if not July. This will help U.S. financial conditions and markets, he said.

“The fact is that the Committee has spent three consecutive policy meetings discussing the balance sheet in detail, and to us that suggests some urgency in addressing the questions surrounding its future,” Mr. Miller said.

Follow related authors and topics

Authors and topics you follow will be added to your personal news feed in Following.

Interact with The Globe