Late last week, Federal Reserve officials reported on their review minutes of recent meetings and called their monetary policy “likely to remain appropriate for a time” even amid what they saw as persistent downside risks, Bloomberg reported over the weekend.
The minutes of the Dec. 10-11 Federal Open Market Committee released Friday noted that global developments, related to both persistent uncertainty regarding international trade and weakness in economic growth, continued to pose some risks to the outlook. However, Fed officials left interest rates unchanged at their final 2019 meeting following three straight cuts.
They also signaled expectations that monetary policy would be on hold through 2020, which would keep the central bank on the sidelines during a U.S. presidential election year. Participants saw sustained economic expansion, labor market strength, and inflation near their 2% goal as the most likely outcomes, in part because of their monetary policy support. A number said the economy was showing resilience amid global headwinds.
Fed officials worried that inflation continued to fall short of their 2% target, the minutes said. “Various participants were concerned that indicators were suggesting that the level of longer-term inflation expectations was too low.”
Policy makers were also optimistic about the labor market, with participants remarking on indications that the unemployment rate could fall further without putting pressure on inflation. In addition, a “number of participants noted that the labor force participation rate could rise further still,” the minutes said.
Thirteen of 17 officials forecast leaving rates on hold in 2020, according to projections released at the last meeting, with four penciling in a quarter-point hike. A majority forecast at least one increase in 2021 and 2022. Not a single official forecast a rate cut in the next three years.
Officials also focused on their recent steps to calm money markets following strains in September that sent overnight rates surging. Among topics mentioned were “the potential role of a standing repo facility in an ample-reserves regime,” the minutes said.
The Fed provided $256 billion of temporary liquidity via open market repurchase operations over the end of the year to avoid a cash crunch. The final operation of 2019 saw just $25.6 billion pumped into the system, compared with a maximum available offering of $150 billion. It plans repo operations through January.
The minutes also discussed highlights from the system’s open market account manager’s report to the committee with the expectation that the Fed could consider expanding security purchases for reserve management to include coupon-bearing Treasury securities with a short time to maturity if necessary to ease liquidity constraints in the Treasury bill market.
The minutes noted that expectations for the future include a gradual transition away from active repo operations next year as bill purchases supply a larger base of reserves, although it noted that “some repos might be needed through April, when tax payments reduce reserves,” and that it may be appropriate at some point to adjust rates on excess reserves and on overnight reverse repurchase agreements.
It noted that the Fed is currently buying $60 billion of Treasury bills a month to boost bank reserves and meet longer-run liquidity demand.
So, we will see. Considerable uncertainty continues to threaten the outlook as the mid-January date for signing Phase One of the expected China deal approaches and as tensions with Iran continue to grow. At the same time, it is clear that the sharp signs of economic slowdown that were evident in recent months have abated significantly, in spite of the new threats from the Middle East, Washington Insider believes.
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