Fed minutes leave questions on balance sheet, patience

The Federal Reserve building in Washington, DC.
The Federal Reserve building in Washington, DC.PHOTO: AFP

NEW YORK (REUTERS) - Federal Reserve policymakers on Wednesday (Feb 20) gave little sense of how long their "patient" stance on US interest rate policy would last, and while promising "before too long" a plan for their US$4 trillion (S$5.4 trillion) balance sheet, left unclear what that plan would entail.

For now, policymakers 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 though "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 US 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 US tax cuts.

A raft of Fed policymakers 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 signaled it may slow or end reductions to its $4 trillion balance sheet. This was built up in the wake of the 2007-09 recession but policymakers began trimming its bond holdings in the final months of 2017.

Two Fed policymakers said in recent weeks the balance sheet runoff could end this year.

The minutes released Wednesday show Fed policymakers 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 US Multi-Sector Fixed Income at BlackRock, 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 US 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," Miller said.