Fed Ready to Pause on Interest Rate Increases

The minutes did not mention that investors also fear that the Fed will make a mistake by raising interest rates too quickly, snuffing out the economic expansion.

The recent downturn in financial markets is both a symptom of these worries and a potential problem in its own right. Declines in invested wealth, or reductions in lending, can infect the broader economy.

The message from Fed officials is that the Fed will wait to see who is correct.

“If the pessimism evident in financial markets eventually shows through to economic outcomes, there would be less need (and perhaps no need) for further increases in interest rates,” Mr. Rosengren said. “However, my current expectation is that the more optimistic view will prevail.”

To reinforce that policy decisions will depend on the latest economic data, the minutes said that the officials discussed changes in the Fed’s communications. Since the 2008 crisis, the Fed has leaned heavily on “forward guidance” to manage market expectations about its plans. In recent months, it has sought to reduce that guidance, encouraging investors to focus instead on the latest economic data.

At the December meeting, Fed officials also continued to discuss the Fed’s gradual reduction of its holdings of Treasuries and mortgage bonds, which were acquired during and after the financial crisis as part of the central bank’s campaign to stimulate economic growth.

The Fed, which is reducing the holdings at a regular pace, has said that it does not want to adjust that pace in response to changes in economic conditions, preferring to adjust interest rates instead. But the minutes said that Fed officials discussed the possibility of adjusting the pace for technical reasons, as part of the process of determining how large a portfolio the Fed should maintain in the longer term.

Article source: https://www.nytimes.com/2019/01/09/business/economy/fed-interest-rates-minutes.html?partner=rss&emc=rss