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Fed Minutes Show Some Rate Flexibility During Uncertain Times

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Federal Reserve policymakers last month grappled with “significant uncertainties” and persistently low inflation as they scrapped forecasts for interest-rate hikes in 2019 even while voicing the need to maintain policy flexibility.

“Several participants noted that their views of the appropriate target range for the federal funds rate could shift in either direction based on incoming data and other developments,’’ according to minutes of the March 19-20 Fed meeting, released Wednesday in Washington.

The minutes show U.S. central bankers reacting to a fourth-quarter slowdown that appeared to be extending into the first three months of the year. They also cited several uncertainties, ranging from Brexit deliberations, to risks of persistent softness in domestic spending and deeper-than-expected slowdowns in Europe and China.

The Fed’s median estimate last month showed no hikes for the remainder of 2019, erasing their forecast from December for two increases this year. Central bankers left the target policy rate unchanged in a range of 2.25 percent to 2.5 percent.

“A majority of participants expected that the evolution of the economic outlook and risks to the outlook would likely warrant leaving the target range unchanged for the remainder of the year,” the minutes said. Some officials saw higher rates as appropriate later this year if economic growth continued above its longer-run trend rate, according to the minutes.

Even with the slowdown and risks, the Fed’s outlook remained broadly positive, as “participants generally expected economic activity to continue to expand, labor markets to remain strong and inflation to remain near 2 percent,’’ the minutes said.

But policymakers continued to puzzle over the economy’s low inflation, suggesting it could be the result of too-low public expectations about increases over time or more-ample labor- market slack.

Preferred Gauge

Price gains, according to the Fed’s preferred measure minus food and energy, decelerated to 1.8 percent in January from 2 percent in December. A Labor Department report earlier Wednesday showed a separate measure of core inflation unexpectedly slowed in March, potentially because a change in data collection may have pushed down apparel prices.

“In light of these considerations, some participants noted that the appropriate response of the federal funds rate to signs of labor market tightening could be modest provided that signs of inflation pressures continued to be limited,” the minutes said.

The Fed’s pivot on interest rates came amid relentless attacks on the central bank by President Donald Trump and some of his advisers. Last week, Trump called for a rate cut and the resumption of Fed bond purchases to turn the world’s largest economy into a “rocket ship.”

The president recently said he would appoint two political loyalists to the Fed Board — Stephen Moore, a Heritage Foundation fellow, and former pizza executive Herman Cain. Senate Republicans, usually reluctant to go against Trump in public, have begun raising questions about the prospect of a Cain nomination.

Growth Forecasts

While Trump has suggested that economic growth below 3 percent is unacceptable, Fed policymakers expect expansion to slow to a more sustainable pace of around 2 percent this year.

Since the meeting, the Atlanta Fed’s GDPNow estimate for first- quarter growth has increased to 2.3 percent. Nonfarm payrolls rose by 196,000 jobs in March, indicating the labor market remains broadly healthy following an unexpectedly low reading in February.

Also last month, the Fed announced that the shrinking of the balance sheet — a policy sometimes called quantitative tightening — would slow in May and end in September. The minutes showed that officials held a discussion about an operational approach to their regime of ample bank reserves that would involve a “minimum operating level” of bank reserves.

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