Fed hints a bias toward hiking endures as balance-sheet rolloff nears end

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Federal Reserve policy makers see 2019 marking the end of their balance sheet run-off, but not necessarily their interest-rate increases.

Minutes of the central bank’s Jan. 29-30 policy meeting released on Wednesday showed “almost all participants” agreeing it best to halt roll-offs this year, a move that should be welcomed by investors worried the balance sheet draw-down is hurting the economy.

The news on interest rates was less friendly to financial markets, where some investors think the next move in interest rates might be down. Minutes, instead, showed Fed officials were divided over what it would take for them to raise rates again. There was no suggestion of a cut.

“The debate is still focused on whether to tighten or not, and not whether to cut,” said Wrightson ICAP LLC chief economist Lou Crandall. “The risk is tilted in the direction of more tightening.”

Risky Business

Fed officials dedicated a large portion of their discussion to concerns over risks facing the U.S. economy, ranging from slower growth in China and Europe and waning fiscal stimulus, to ongoing trade disputes and the complications from the U.K. exit from the European Union. Due to those worries, several officials “nudged down their outlooks for output growth,” the minutes showed.

The minutes also hammered home the point that officials would proceed cautiously. The record included a lengthy justification for being “patient” in deciding when and how next to adjust policy.

Still, all the discussion of downside risks and patience didn’t shift the debate into the territory where cuts came into view. Pricing in federal funds futures indicate a small chance that the Fed’s next move will be a rate cut.

Read more at Bloomberg

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