Federal Reserve officials appear to be comfortable staying on the sidelines after cutting interest rates three times in 2019, but a few of them worry that low rates could spark excessive risk-taking in financial markets, according to minutes of their December 2019 meeting.
The Dec. 10-11 meeting resulted in the Federal Open Market Committee pausing its run of policy easing, holding its benchmark federal funds rate steady. Fed officials' quarterly projections also showed most of them leaned toward holding rates flat in 2020.
Fed officials believe rates are likely to stay at their current levels unless they see a "material reassessment" of their economic outlook, minutes of the December meeting showed.
The minutes, released Jan. 3, revealed few details on what changes would be considered "material" enough to push the Fed to cut rates again — or perhaps raise them. But they hinted at some disagreement among officials over how long they should keep interest rates low.
A few Fed officials were concerned that an extended period of low rates could encourage investors to take excessive risks, potentially strengthening the case for the Fed to guard against imbalances with its regulatory tools. Persistently low rates "could make the next recession more severe than [it] otherwise" would be, those policymakers argued.
But those officials appeared to be in the minority, bolstering Fed Chairman Jerome Powell's view that the central bank should not reverse its 2019 rate cuts until it sees a sustained move up in inflation, Katherine Judge, an economist at CIBC Economics, wrote in a note to clients.
Meanwhile, a number of Fed officials agreed that keeping rates unchanged would let them assess how their 2019 rate cuts are affecting the economy.
The central bank discussed that "maintaining the current stance of policy for a time could be helpful for cushioning the economy from the global developments that have been weighing on economic activity" and for getting inflation back to 2%, the minutes showed.
Richmond Fed President Thomas Barkin appeared to align himself with that view in a speech earlier on Jan. 3, saying that the U.S. economy "looks healthy in many respects."
"While there is always the risk of a shock, the Fed has done a lot to support the economy's continued expansion and to provide buffers against the downside," said Barkin, who is not scheduled to vote on the FOMC until 2021.
Meanwhile, Dallas Fed President Robert Kaplan, who is rotating into an FOMC voting spot this year, told CNBC he expects more sluggishness in business fixed investment and manufacturing but that a strong consumer sector should propel the economy to a 2020 growth rate of around 2% or 2.25%.
"I don't think we should be making any moves at this point on the fed funds rate," he told CNBC. "Obviously, we'll keep revisiting that as the year goes on."
And Cleveland Fed President Loretta Mester, who is also an FOMC voter in 2020, told Bloomberg Television that GDP is likely to grow about 2% this year.
"I'm pretty happy with where policy is at the moment," Mester said, adding that officials should "wait and see" as they evaluate their next steps.
Overall, Fed officials generally agreed the U.S. economy would likely continue to grow at a healthy pace, an outlook they said reflects "at least in part" the support the Fed has provided to the economy.
But many saw the risks to that outlook as "tilted somewhat to the downside," even if worries had eased to an extent ahead of the December meeting, the minutes showed.
Two key policy uncertainties appear to have become even less hazy after the Fed meeting. U.K. voters gave Prime Minister Boris Johnson's Conservative Party its largest majority since 1987, sharply reducing the risk of a no-deal Brexit. In addition, the trade war between the U.S. and China eased after both countries agreed to the text of a "phase one" trade deal, which President Donald Trump says he will sign on Jan. 15.
A number of Fed officials said the U.S. economy "was showing resilience in the face of headwinds," noting that recession-probability gauges had dropped substantially in recent months.
But "new uncertainties had emerged regarding trade policy with Argentina, Brazil and France, and political tensions in Hong Kong persisted," the minutes said.
The Fed's rate cuts were in large part aimed at protecting the U.S. economy against slower global growth and continued downside risks, but muted inflation pressures were also a major factor.
The Fed's preferred inflation gauge, the personal consumption expenditures index excluding food and energy prices, remains below the central bank's 2% target, rising by 1.6% year over year in November.
Policymakers generally expect inflation to gradually return to 2%, with a number of them saying that some factors that have held down inflation in recent months "were likely to prove transitory."
But various Fed officials worried that longer-term inflation expectation levels appear to be "too low," and they noted that inflation has been largely stuck below 2% despite continued improvements in the labor market. Policymakers also expressed concerns that globalization and long-running changes in technology "were exerting downward pressure on inflation that could be difficult to overcome."