Fed officials struggled to assess Trump’s stimulus impact

WASHINGTON - Federal Reserve officials last month struggled to come to grips with two big uncertainties facing the U.S. economy: whether it would be safe to let inflation rise faster for a while and how to assess the impact of President Donald Trump’s ambitious economic stimulus plans.

Minutes of the Fed’s discussion at its March monetary policy-setting meeting released Wednesday showed near-unanimous support for the quarter-point increase in its key interest rate, the second rate hike in three months. But there was less agreement over the issues of inflation and Mr. Trump’s economic plans.

The group decided to keep signaling that future rate hikes would be gradual but be prepared to respond quickly to changes in the economic outlook. Many analysts believe the Fed will hold rates steady at the May meeting.

The minutes also showed that Fed officials had a briefing from staff over the central bank’s massive $4.5 trillion balance sheet, which was quadrupled during the financial crisis and its aftermath as the central bank engaged in successive rounds of bond purchases as a way to lower long-term interest rates and give the weak economy a boost.

The minutes said Fed officials agreed that if the economy continued to perform as expected that “a change in the committee’s reinvestment policy would likely be appropriate later this year.”

Currently, the Fed has been keeping the level of the balance sheet steady at $4.5 trillion. But financial markets have been closely watching for any Fed signal on the timing of when it would begin reducing the level of its bond holdings by halting its current practice of replacing any maturing bonds.

The minutes indicated that this change could be announced later this year, “which is perhaps a little sooner than most in the markets were anticipating,” according to an analysis by Paul Ashworth, chief U.S. economist at Capital Economics.

“The Fed hasn’t decided whether it will cease the reinvestment policy in one fell swoop or cushion the blow by phasing out reinvestment more gradually,” Ashworth added. “Either way, the policy change will be signaled well in advance.”

Wall Street went into a sudden reversal after the minutes were published, erasing what had earlier been jump of some 200 points for the Dow Jones industrials index. It was trading in negative territory just before the closing bell.

The minutes showed that several Fed officials believed Mr. Trump’s stimulus plans would likely not begin until next year. The minutes said because of the “substantial uncertainties” about the outlines of the program that will eventually emerge from Congress, about half of the Fed officials had not included any assumptions about the president’s efforts in their economic forecasts.

While most believed his plans had the potential to boost growth, some said there were also downside risks from a possible adverse economic reaction from Mr. Trump’s measures to limit immigration and to increase trade barriers to protect American workers.

On inflation, the minutes showed that some Fed officials worried that if unemployment, currently at a low of 4.7 percent, fell even further, it could pose a “significant upside risk” of higher inflation. The Fed’s two goals are to achieve maximum employment and keep inflation moderate. Unemployment is currently below the Fed’s 4.8 percent goal, while inflation has remained below the Fed’s 2 percent inflation goal for several years.

While some Fed officials argued that the inflation target might be achieved by the end of this year, others argued that since inflation had run below 2 percent for so long, it would do no harm to allow prices to rise above 2 percent for a time.

“A few members expressed the view that the committee should avoid policy actions or communications that might be interpreted as suggesting the committee’s 2 percent inflation objective was actually a ceiling,” the minutes said.

However, in the view of Michael J. Gregory, deputy chief economist at BMO Capital Markets, overall “More participants grew more uncomfortable with the risks of overshooting.”

The Fed’s decision to boost its key policy rate by a quarter-point left it in a range of 0.75 percent to 1 percent.

The Fed continued to signal that it expected to boost rates three times this year, and many private economists believe the upcoming rate hikes might occur at the June and September meetings. The rate-setting committee’s next meeting is May 2-3.

The minutes were released with the customary three-week time delay after the March meeting.