The Marriner S. Eccles Federal Reserve building stands in Washington, D.C., U.S., on Monday, April 8, 2019. The Federal Reserve Board today is considering new rules governing the oversight of foreign banks. Chairman Jerome Powell said the Fed wants foreign lenders treated similarly to U.S. banks. Photographer: Andrew Harrer/Bloomberg “Several participants suggested that inflation modestly exceeding 2% for a period would be consistent with the achievement of the committee’s longer-run inflation objective and that such mild overshooting might underscore the symmetry of that objective,” according to the minutes.
The Fed’s preferred price measure rose 1.6% last year, and central bankers have failed to achieve their target on a sustainable basis since the target was announced in 2012.
“There are a few doves on the committee that are implicitly saying they want to do a make-up strategy,” where a central bank compensates for undershoots with overshoots on inflation, said Joseph Song, senior U.S. economist at Bank of America Corp. in New York.
The bank forecasts the Fed will maintain the federal funds rate in its current range of 1.5% to 1.75% through 2021. However, “most participants think that the insurance cuts they did last year will put the economy in a place where inflation will pick up again,” he said.
Futures traders maintained expectations for the Fed to lower interest rates at least once this year, pricing in about 40 basis points of easing by the end of December. The 10-year Treasury yield were little changed at 1.56%, while the Bloomberg dollar index and the S&P 500 held gains.
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The U.S. economy began 2020 on solid footing with payrolls rising by 225,000 in January. The jobless rate edged up to 3.6%, still near a half-century low, while average hourly earnings climbed 3.1% from a year earlier. The coronavirus has raised questions about global growth, including the potential for spillovers affecting the U.S.
Fed Chairman Jerome Powell told lawmakers in semi-annual testimony last week “it’s too uncertain to even speculate” on how the outbreak would impact the economy or if it could present a “material change” to the outlook, though he said the impact on China should be “substantial.”
U.S. central bankers are counting on household consumption -- aided by low interest rates -- to sustain growth and help lift inflation back to the 2% target.
Officials saw consumption spending as likely to remain on a firm footing, “supported by strong labor-market conditions, rising incomes, and healthy household balance sheets.”
Elsewhere in the minutes, policy makers grappled with a variety of issues: Inflation ranges as a tool to achieve their 2% target, how to adapt policy to combat financial-stability risks, and how they would wind down ongoing repurchase agreement and Treasury-bill purchases.
Repos, Bills
The staff official in charge of open-market operations told policy makers that in the second quarter, reserve conditions would “support slowing the pace of Treasury bill purchases.”
U.S. central bankers are buying $60 billion of bills per month to boost reserve balances and plan to continue the operation into the second quarter. They are also conducting term and overnight repurchase agreements at least through April to offset seasonal demands for payments and cash.
Within their ongoing framework review, officials held their most substantive discussion to date about the possibility of transforming their inflation target into a range. The review began in early 2019 and is meant to assess whether the Fed has the right tools and strategies to deal with persistently low interest rates and low inflation.
The committee considered inflation ranges based on three concepts: an “uncertainty” range, meant to communicate how wide inflation outcomes might vary and still be considered consistent with the target; an “indifference” range, emphasizing that policy need not respond to deviations within the range; and an “operational” range that could be used when officials wanted inflation to favor one side.