Fed sees inflation rebounding; can be patient on rates

The latest slip in inflation probably will be short-lived and interest rates could stay where they are “for some time,” according to minutes of the Federal Open Market Committee’s April 30-May 1 meeting.

The minutes reiterated the stance Chair Jerome Powell offered at his post-meeting press conference.

“Members observed that a patient approach to determining future adjustments to the target range for the federal funds rate would likely remain appropriate for some time,” the minutes, released Wednesday, stated.

The Marriner S. Eccles Federal Reserve building stands in Washington, D.C., U.S., on Tuesday, Jan. 27, 2015. The Federal Reserve Board joins with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation in pushing for higher capital requirements for large banks.
The Marriner S. Eccles Federal Reserve building stands in Washington, D.C., U.S., on Tuesday, Jan. 27, 2015. The Federal Reserve Board joins with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation in pushing for higher capital requirements for large banks.

The minutes also showed an upbeat assessment of the economy this year, although that was before tariffs on China were raised. While the staff saw real GDP growth slowing “in the near term” because “sizable contributions from inventory investment and net exports were not expected to persist,” estimates for medium-term growth were “revised up, primarily reflecting a lower assumed path for interest rates, a slightly higher trajectory for equity prices, and somewhat less appreciation of the broad real dollar,” the minutes said.

The inflation decline was seen “as likely to be transitory,” according to many participants.

The panel also was briefed about two possible strategies for the composition of its portfolio: one used a maturity scale similar to current outstanding Treasuries, while the other contained maturities no longer than three years.

The shorter-term portfolio “would put significant upward pressure on term premiums and imply that the path of the federal funds rate would need to be correspondingly lower to achieve the same macroeconomic outcomes as in the baseline outlook.”

The other “would not be expected to have much effect on current staff estimates of term premiums and thus would likely not reduce the scope for lowering the target range for the federal funds rate target in response to adverse economic shocks.”

Bullard
The Fed might have “slightly overdone it” with its December interest rate increase, making rates “a little restrictive,” Federal Reserve Bank of St. Louis President James Bullard said on Bloomberg TV.

He repeated his belief that talk of a rate cut is premature, although it would send a message. “If we cut a quarter point in an environment where the U.S. economy is surprising to the upside again in 2019 that would probably send a signal that we are serious about hitting the 2% inflation target.”

In prepared text of a speech in Hong Kong Wednesday, he said: “A downward policy rate adjustment even with relatively good real economic performance may help maintain the credibility of the FOMC’s inflation target going forward. A policy rate move of this sort may become a more attractive option if inflation data continue to disappoint.”

Williams
Federal Reserve Bank of New York President John Williams told reporters there is no “strong argument … to move interest rates one way or the other,” according to reports. He said he’s watching how risks play out “and importantly how inflation trends move.”

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Monetary policy Jerome Powell John Williams James Bullard Federal Reserve Federal Reserve Bank of New York Federal Reserve Bank of St. Louis FOMC
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