US Federal Reserve addresses balance sheet and rate hikes in FOMC meeting

The US Federal Reserve just released minutes from its last Federal Open Market Committee (FOMC) meeting. The meeting reveals why the Fed was patient about rate hikes and how they will deal with its balance sheet.

Why is the Fed being patient about rate hikes?

The Federal Reserve chair, Jerome Powell, decided to pause a raise in interest rates last month. The decision was a reversal of its earlier move in raising rates in fall 2018. The rate hikes caused Wall Street volatility, which may have influenced its latest move. In its January meeting, the Fed detailed why it put a hold on the rate hikes.

'Participants pointed to a variety of considerations that supported a patient approach to monetary policy at this juncture as an appropriate step in managing various risks and uncertainties in the outlook,’ read the minutes.

‘A patient posture would allow time for a clearer picture of the international trade policy situation and the state of the global economy to emerge and, in particular, could allow policymakers to reach a firmer judgment about the extent and persistence of the economic slowdown in Europe and China,’ added the Fed.

While the Fed officials voted unanimously to put rates on hold because of volatility in the US economy, there was a division among the officials about how long to halt the rate hikes. Some want to pause rate hikes only when inflation was high, while others wanted to raise rates by the end of 2019.

What did the Fed say about its balance sheet?

The US central bank officials also discussed bond reduction on its balance sheet, according to the FOMC meeting minutes. ‘Almost all participants thought that it would be desirable to announce before too long a plan to stop reducing the Federal Reserve's asset holdings later this year. Such an announcement would provide more certainty about the process for completing the normalization of the size of the Federal Reserve's balance sheet,’ read the FOMC meeting minutes. Fed officials also discussed how important it was to be open in its balance sheet normalization.

‘Consistent with this principle, participants agreed that it was important to be flexible in managing the process of balance sheet normalization, and that it would be appropriate to adjust the details of balance sheet normalization plans in light of economic and financial developments if necessary to achieve the Committee’s macroeconomic objectives,’ noted the minutes.

The Federal Reserve’s latest meeting minutes show that while the Fed is independent of Wall Street, the US stock market and the economy weigh more on the Fed than previously thought.