(Reuters) - Federal Reserve policymakers thought pausing on U.S. interest rate hikes last month posed little risk and plenty of benefit, minutes from their Jan. 29-30 meeting showed, giving them time to assess the effects of a global slowdown and the Fed’s rate hikes to date on U.S. economic momentum.
Participants agreed on the importance on being flexible on balance sheet normalization and most thought it desirable to announce soon a plan to end the Fed’s asset holdings reduction later this year.
* Fed members noted tightening financial conditions and uncertainties surrounding the evolution of U.S. and foreign government policies
* Participants said softness in core and total inflation a reason for patient approach to policy
* Policymakers favored patient approach to observe effects of past rate hikes
* Members decided not to express a judgment on the balance of risks given the degree of uncertainty around the outlook
* Policymakers ‘agreed’ it was important to be flexible on balance sheet normalization, would be appropriate to adjust if needed
* Almost all participants thought it desirable to announce before too long a plan to stop reducing the Fed’s asset holdings later this year
STOCKS: S&P 500 seesawed in tight range either side of flat, last up 0.24 percent
BONDS: U.S. Treasury yields rose; 2s at 2.4996 pct; 10s at 2.6500
FOREX: The U.S. dollar index was last down 0.1 percent after briefly moving slightly higher
JOSEPH LAVORGNA, AMERICAS CHIEF ECONOMIST, NATIXIS, NEW YORK
“It’s obvious that the Fed was responding to financial market conditions.
“The one takeaway is that it seems to me that if the Fed is going to do anything that the next move would probably still be a hike because the baseline of growth is going to continue to be, while slower, modestly above trend and inflation is going to stay near target and the job market is still healthy. Once you get through this period of uncertainty and markets calm down, which is what the minutes seemed to intimate, then the next move is going to be a hike.
“There wasn’t any panic in the minutes. There was nothing to suggest the Fed’s going to be cutting rates. I think they’re still trying to stick to the script of ‘Look, it’s more likely that rates go up than down because neutral is still probably slightly higher than the current funds rate is.’ By the way, I don’t think any of that is going to happen.
“The Fed is going to be proven incorrect in trying to raise rates unless other central banks around the world start to normalize policy, and that just doesn’t seem to me likely. If anything, they’re moving in the opposite direction of doing more easing.”
MOHAMED EL-ERIAN, CHIEF ECONOMIC ADVISER AT ALLIANZ, NEWPORT BEACH, CALIF.
“The minutes were not as deterministic as market optimists had hoped when it comes to the consideration that appeared to anchor the Fed’s dramatic policy U-turn in January. The Fed now faces an even more delicate communication challenge as early as next month.”
TIM GHRISKEY, CHIEF INVESTMENT STRATEGIST, INVERNESS COUNSEL, NEW YORK
“(The Fed) did make a statement that they thought that the tightening done in the fourth quarter had an impact on equity markets. I think it’s interesting that they admitted that. They say they’ll be much more transparent about the size of the Fed’s balance sheet and that further quantitative tightening would be very data dependent. They also said they were going to announce before too long a plan to stop their reduction (of the balance sheet). The transparency is a big thing and it will be greeted favorably by the market. It seems like they want to avoid a market selloff like we had in the fourth quarter. Reading between the lines, it seems they thought that was damaging to the economy. But it sounds like they will continue to reduce the balance sheet until some time later this year. That may be what is causing a mixed reaction in the markets. That’s the only negative thing here, though to me it’s not a surprise.”
YOUSEF ABBASI, GLOBAL MARKET STRATEGIST, INTL FCSTONE, NEW YORK
“On balance it’s probably a little bit less dovish than people expected. In continuing to digest this, you’ll probably see rates move higher and the stock market come in.
“In October 2018, people were calling for three rate hikes, that seemed preposterous. You got to the end of 2018, people had backed off that completely. You got into early 2019, people started talking rate cut before rate hike. The Fed is taking the right approach in terms of wait and see. But I do also think that some of their concerns are being or have been addressed. To me that reads a little less dovishly than market and investors have thought. It almost felt like getting back towards 2,800 (S&P 500).
“We’ve gotten a little ahead of ourselves, and with global growth slowing dramatically it just felt like the investor was relying on a dovish message not only from the Fed but from all the major central banks.”
JOE MANIMBO, SENIOR MARKET ANALYST, WESTERN UNION BUSINESS SOLUTIONS, WASHINGTON
“The minutes largely echoed the Fed’s cautious statement from its last meeting. I get the sense that rates are on hold until later this year. We conclude that the minutes are consistent with the Fed maintaining steady rate policy over coming meetings. But the Fed stopped well short of closing the door to a rate hike later this year if the downside growth risks subside. The minutes were a bit less dovish than the market had anticipated, especially since the Fed expects to wind down its balance sheet reductions this year. It’s premature yet on directional signals for rates - whether they could go up or down. I think this is neutral for the dollar.”
KATHY JONES, CHIEF FIXED INCOME STRATEGIST, SCHWAB CENTER FOR FINANCIAL RESEARCH, NEW YORK
“I don’t think that it’s really surprising except that the markets are looking for some fairly dovish comment. And what we got in that regard was already conveyed at the press conference: they’re worried about the global slowdown, the tightening in financial conditions, they’re worried about trade and the government shutdown. None of that is a big surprise.
“But they are open to rate hikes down the road and the market has not priced in the potential for rates to go up rather than down from here. I think that might be behind the market reaction.”
RYAN SWEET, HEAD OF MONETARY POLICY RESEARCH, MOODY’S ANALYTICS, WEST CHESTER, PENNSYLVANIA
“The most important thing is the discussion about the balance sheet. (Cleveland Fed President Loretta) Mester and Fed Governor Lael) Brainard already suggested that the end of balance sheet normalization could happen later this year. They want to err with on the side with more bank reserves. They don’t know what is the equilibrium amount of excess reserves. But I don’t think the balance sheet normalization should to be blamed on the tightening financial conditions in the fourth quarter. The Fed has got a perfect window to pause. They could let inflation to run higher than their target.
“The overall tone of dovishness is not surprising. It’s pretty clear something has changed. They are near their equilibrium rate level. It’s time they pause. The bar is pretty high for another rate hike. The economy has to be really gangbuster.”
OLIVER PURSCHE, VICE CHAIRMAN AND CHIEF MARKET STRATEGIST, BRUDERMAN ASSET MANAGEMENT, NEW YORK
“There doesn’t seem to be much in there other than an apparent consensus to discuss a plan to slow balance sheet reduction in the March meeting. The general talking points have been centered around a gradual slowdown of continued growth.”
“There’s nothing jarring, and I think the market is reflecting that. Keep in mind, Powell has been very good at telegraphing just about anything and everything. It was all things they’ve said before.
“I was a little bit surprised at how much of a consensus there appeared to be to discussing a plan to slow down the balance sheet reduction, but markets are reacting in a very expected and calm manner because there’s nothing surprising there.”
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