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Fed charts a more cautious course, expects to halt balance sheet reduction

Federal Reserve Chairman Jerome Powell

After signaling change from a policy of gradually raising rates, members of the Federal Open Markets Committee said a "patient" approach would provide more time to assess the domestic and global economies before making another rate adjustment, according to minutes released Wednesday from its Jan. 29-30 meeting.

At that meeting, the committee held the target range for the federal funds rate at 2.25% to 2.5%, following four quarter-point rate hikes in 2018.

FOMC members said a "patient approach to monetary policy at this juncture" is appropriate to manage risks, the minutes showed. As the committee mulls its next move, policymakers will keep an eye on business and consumer sentiment, the inflation rate and the effect of tightening financial conditions on aggregate demand.

"Information arriving in coming months could also shed light on the effects of the recent partial federal government shutdown on the U.S. economy and on the results of the budget negotiations occurring in the wake of the shutdown, including the possible implications for the path of fiscal policy," the minutes stated. "A patient approach would have the added benefit of giving policymakers an opportunity to judge the response of economic activity and inflation to the recent steps taken to normalize the stance of monetary policy."

It's unclear if there will be a rate adjustment in 2019. "Many participants suggested that it was not yet clear what adjustments to the target range for the federal funds rate may be appropriate later this year; several of these participants argued that rate increases might prove necessary only if inflation outcomes were higher than in their baseline outlook," the minutes showed.

Committee members expressed concerns about the "uncertainty or worries about slowing global economic growth, including in Europe and China; trade policy; waning fiscal policy stimulus; and the partial government shutdown," according to the minutes.

But committee members didn't commit to staying patient. "Many participants observed that if uncertainty abated, the committee would need to reassess the characterization of monetary policy as 'patient' and might then use different statement language," the minutes stated.

The Fed also signaled an end to its policy of balance sheet reduction. "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."

Fed Chairman Jerome Powell is scheduled to testify before the Senate Banking Committee on Feb. 26.

Bob Miller, BlackRock (BLK)'s head of U.S. multisector fixed income, said in a statement that Mr. Powell should be able to provide Congress with approximate numbers and rough timing for an end to balance sheet shrinking at the hearing. "We expect Chair Powell to explain to Congress the benefits of the dual-floor system, and of holding abundant reserves, which includes the safety and soundness of the banking system," Mr. Miller said.

The committee's next meeting is March 19-20.