Federal Reserve officials last month discussed scaling back a 2017 plan to shrink the central bank's nearly $4 trillion balance sheet, according to minutes of the closed-door meeting released Wednesday.
Fed Chairman Jerome Powell led the discussion, and nearly all top officials at the meeting agreed that the central bank should announce "before too long" details of a new plan to stop reducing the balance sheet later this year.
The disclosure comes as top officials at the central bank signal they've now completed the "normalization" of monetary policy following a series of unprecedented steps taken to heal markets and the economy following the 2008 financial crisis. As the economy tipped into recession that year, the Fed slashed benchmark interest rates to near zero -- to stimulate borrowing -- and bought up trillions of dollars of Treasury bonds and mortgage bonds in an effort to bid up asset prices.
In 2015, the central bank started raising the benchmark U.S. interest rate, and under a separate plan started in 2017, officials have been letting up to $50 billion of the Fed's Treasury and mortgage bonds mature each month without reinvesting the proceeds. But President Donald Trump has repeatedly criticized Powell, his own appointee to the top Fed post, for tightening monetary policy too quickly, and the latest minutes showed that Fed officials were taken aback by the stock market's sharp decline in December -- a signal that at least some traders agreed with the president's assessment.
"I don't think any of the Fed officials were really prepared for that abrupt shift in market sentiment and tone," said Charlie Ripley, senior investment strategist at Allianz Investment Management.
According to the minutes, Fed officials viewed U.S. economic growth as "solid" but are determined to be "patient" on any future interest-rate increases. The central bank usually raises interest rates to curb borrowing when the economy runs hot, to curb excessive borrowing and minimize the risk of runaway inflation.
While the U.S. unemployment rate, currently at about 4%, remains close to the lowest in a half-century, consumer price increases have stayed roughly constant around an annual rate of 2%, giving the Fed flexibility to hold off on further rate hikes.
"Members continued to view sustained expansion of economic activity, strong labor market conditions and inflation near the committee's symmetric 2% objective as the most likely outcomes for the U.S. economy in the period ahead," according to the meeting minutes. "[But] in light of global economic and financial developments and muted inflation pressures, the committee could be patient as it determined what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes."
Analysts at Wells Fargo had projected a couple of years ago that the Fed would reduce total assets to as little as $2.5 trillion, but Wall Street analysts predicted in recent months that the Powell might scale back that plan given economists' projections for a slowdown in growth this year, as the stimulus fades from Trump's late-2017 tax cuts.
The Fed's last interest-rate increase, a 0.25 percentage point hike in December to a range between 2.25% and 2.5%, sent U.S. stocks plunging. However, equities have since recovered after Powell signaled that the Fed would pause further hikes pending signs that growth remains on track.
Ending the balance-sheet reduction plan is another way of easing pressure on volatile markets, Ripley said.
According to the minutes, Fed officials are closely monitoring key market factors, including Trump's ongoing trade negotiations with China, the potential for further government shutdowns and recent signs of an economic slowdown in Europe.
"The Fed minutes support the patient and prudent speech we heard from Chairman Powell in January," said Jeff Marks, senior portfolio analyst with Action Alerts PLUS, Jim Cramer's VIP club for investors. "Now the market's attention is squarely back on trade, and whether or not a meaningful deal with China will occur."