News from S&P Global Marketing Intelligence: Fed Minutes Show Most Officials Support Stopping Balance Sheet Cuts This Year

Most Federal Reserve officials believe the central bank should lay out a plan "before too long" to stop cutting its $4 trillion balance sheet "later this year," according to minutes of their latest meeting.

That approach would be favored by "almost all" officials at the Fed, the minutes showed. The document adds more detail to the ongoing discussions at the central bank over the future of its balance sheet, which had swelled to $4.5 trillion after the financial crisis.

The meeting had resulted in the Fed pausing its short-term interest rate hikes and saying it "will be patient" on future rate changes.

But another major news item from the meeting centered on the Fed's balance sheet, which the central bank began cutting by up to $50 billion each month in 2017. Fed Chairman Jerome Powell indicated at his news conference that the Fed was flexible in taking those cuts off autopilot.

Two Fed officials, Fed Governor Lael Brainard and Cleveland Fed President Loretta Mester, said in recent days they would support ending the effort this year. The minutes suggest that view has widespread support at the central bank.

"Such an announcement would provide more certainty about the process for completing the normalization of the size of the Federal Reserve's balance sheet," the document said.

It also included the discussions among Fed officials on their switch to a "wait-and-see" approach on any future rate changes. The Fed hiked rates four times in 2018, but several Fed officials had "nudged down their outlooks" for growth heading into the January meeting. They cited the deceleration of global growth, tighter financial conditions and declining consumer and business sentiment as some key drivers in their more pessimistic view.

But Fed officials believe that the "most likely outcomes over the next few years" will feature sustained economic growth, continued strengthening in the labor markets and inflation staying around the Fed's 2% target, the minutes show.

All of the Federal Open Market Committee participants agreed that keeping rates flat was appropriate, saying that a patient approach would give them "an opportunity to judge the response of economic activity and inflation" to their previous rate hikes.

"Furthermore, 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," the minutes said.

Many FOMC participants said they were unsure about what future changes to interest rates may be needed. Several of them said rate hikes "might prove necessary only" if inflation comes in above expectations. But several others said that if the economy performs along their baseline outlook, they "would view it as appropriate" to raise rates again later this year.