Fed minutes of the November 7 to 8 policy-setting meeting showed that another interest rate increase was “likely to be warranted fairly soon,” but also left the door open for debates on when to pause further hikes and how to relay those plans to the public.
The Fed minutes also showed policymakers ticking off a string of issues, including a tightening of financial conditions, global risks, “and some signs of slowing in interest-sensitive sectors,” that had started weighing on their view of the slowing economy.
The Fed minutes further solidified the expectations for a December interest rate hike, but Fed officials also indicated a possible shift in tone about the future.
A few participants who nodded that further rate increases were likely to be warranted also “expressed uncertainty about the timing.” Fed officials also talked about the how to communicate a possible in the approach to the further hikes.
“Participants also commented on how the Committee’s communications in its post-meeting statement might need to be revised at coming meetings, particularly the language referring to the Committee’s expectations for ‘further gradual increases’ in the target range for the federal funds rates,” the minutes showed.
“Many participants indicated that it might be appropriate at some upcoming meetings to begin to transition to statement language that placed greater emphasis on the evaluation of incoming data in assessing the economic and policy outlook; such a change would help to convey the Committee’s flexible approach in responding to changing economic circumstances,” it said.
Stock markets moved slightly higher, albeit volatile, after the release of the Fed minutes, extending a rally that started on Wednesday when the Fed chair Jerome Powell seemed to hint at a possible shift in tone.
The need for “further gradual rate increase” as appropriate to keep the current recovery on track has been a staple of recent Fed statements on policies as the central bank nudged rates back toward more normal levels after decade near zero .
Its removal would indicate potential pause in roughly quarter hikes that had been expected to continue through the year 2019, without committing the central bank to moving or not moving at any certain meeting.
The possible policy shift took place at a meeting at which the Fed also resumed debate on how best to manage short-term interest rates in the future, a move that could influence the final target size of the Fed’s still-massive balance sheet.
Fed staff research and survey of bank executives indicated that the demand for reserves had changed in the years since the crisis, and had been made more complex by new liquidity and other regulations.
Because of the large amount of reserve in the system, and their now diverse uses, meeting partakers “commented on the advantages of a regime of policy implementation with abundant excess reserves,
By contrast they hinted it might be difficult to return to managing short-term rate based on a “scarcity” of reserves, the method used before the 2007 to 2009 financial crisis. The current system depends on the Fed playing interest on some reserves to set the federal funds rate.