U.S. Federal Reserve policymakers see relatively calm economic seas ahead and are happy just to tread water on policy, leaving interest rates unchanged more or less indefinitely, according to the minutes of the Federal Open Market Committee (FOMC) meeting in March, released Wednesday. “A majority of participants expected that the evolution of the economic outlook and risks to the outlook would likely warrant leaving the target range unchanged for the remainder of the year,” the minutes said.
In his press conference following last month's meeting, Fed Chair Jay Powell discussed many of the issues covered, so that the detailed minutes offer little surprise. Markets were mostly unmoved.
Focusing on backward-looking data, the FOMC members truly remained optimistic about the economy, the minutes show, even as they slightly lowered their forecasts for growth. “Members continued to view sustained expansion of economic activity, strong labor market conditions, and inflation near the committee’s symmetric 2 percent objective as the most likely outcomes for the U.S. economy in the period ahead,” the minutes said.
What did give them pause were global economic developments and the stubborn refusal of inflation to gain any traction despite firm labor market conditions and nominal wage increases, as well as higher prices due to tariffs. The best answer they could come up with is that inflation expectations remain exceptionally low and are keeping a lid on price increases.
That drag could make it challenging to meet the Fed’s 2% target on a sustained basis, they felt. “A few participants” are clinging to the notion that the muted inflation even amidst expanding employment indicates more slack in the labor market—that is, part-time workers seeking full-time work and working-age people sitting on the sidelines but ready to jump in as necessary.
Sentiment in the Fed panel is clearly shifting away from a presumption that rates should still go higher, to an open-mindedness about the next move. While “some participants” indicated that if the economy develops as they expect, with growth running higher than its longer-run trend rate, they would probably want to raise the target range for the federal funds modestly this year.
But “several participants” noted their view that the appropriate range for the fed funds “could shift in either direction based on incoming data and other developments.” And “some participants” felt the target rate was likely to remain on a very flat trajectory, reflecting factors such as low estimates of the longer-run, neutral, real interest rate or risk-management considerations.
Policymakers are still wrestling with the problems posed by the dot-plot graph as investors tend to view these projections of where the benchmark rate might be as a concrete strategy thereby viewing policy on a preset course. This has become more of a problem as the next course of action is “unusually uncertain.” On balance, members felt the projections, made each quarter, continue to convey useful information about the outlook for monetary policy.
Participants showed a fair amount of unanimity about tapering the Fed’s balance sheet runoff and halting it in September, keeping assets at a much higher level than before the financial crisis and shifting the current holdings to Treasuries instead of a mix of government and agency securities. Issues like the maturity composition of the portfolio and whether to plan on raising the level of assets soon, to avoid bank reserves drifting downward, were left for further discussion.