Federal Reserve rate-setters said in their latest meeting they aim to keep interest rates unchanged even if there’s an improvement in global conditions, as they stick doggedly to their “patient” approach to policy.

Minutes to the Fed’s most recent policy meeting, held on April 30 and May 1, showed that members of the central bank’s rate-setting Federal Open Market Committee expected policy to be held steady for some time to come after they kept the target range at 2.25-2.5 per cent.

Policymakers engaged in an extended debate over the composition of the central bank’s balance sheet in the longer term. Many participants said they wanted increased scope to counter a future downturn by shifting from shorter-dated bond holdings to longer-term debt, in the hopes this would provide an extra boost in a future downturn.

The Fed is struggling to figure out why US inflation has remained stubbornly sluggish even as unemployment hovers at half-century lows and the economy approaches a record-long expansion.

While the central bank is hoping recent inflation shortfalls prove transitory, in the latest meeting a number of policymakers fretted that inflation expectations could get stuck below the Fed’s target if inflation does not start accelerating in the coming quarters.

The latest minutes suggest that the Fed has no immediate plans to move policy even though Mr Powell and many of his colleagues think the forces pulling down inflation should prove transient. The “patient” approach will probably still be needed even if global economic and financial conditions improve, rate setters said during the latest meeting.

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Since the gathering, trade prospects have if anything taken a turn for the worse, as the US and China prepare to ratchet up tariffs as tensions increase.

While “a few” Fed members thought there could be a case for further rate increases if the economy stays on course, the core members of the Federal Open Market Committee signalled they were not expecting to move policy for the time being.

The minutes did not record an explicit debate about cutting rates, but they noted: “several participants commented that if inflation did not show signs of moving up over coming quarters, there was a risk that inflation expectations could become anchored at levels below those consistent with the Committee’s symmetric 2 per cent objective”.

US markets remained relatively unmoved by the release of the minutes. The S&P 500 remained down quarter of a percentage point, the same level it was ahead of the statement. Treasuries rallied slightly, with the yield on the benchmark 10-year US Treasury dropping fractions of a basis point to be down 3.5 basis points at 2.3909 per cent within 10 minutes of the release. The dollar index remained about 0.1 per cent lower at 98.014.

Jay Powell, the Fed chair, and his committee are also debating how the Fed would respond if there were a major economic setback. One key question is what the Fed’s asset holdings would look like in a downturn, and whether policymakers would want to stage a rerun of the quantitative easing programme that they use to battle the Great Recession.

This comes as they prepare to end the process of shrinking their asset holdings later this year after the balance sheet peaked at around $4.5tn.

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Officials looked at two possibilities: holding a portfolio of US government bonds with a similar range of maturities to those held in the markets, or alternatively concentrating their holdings on securities with maturities of three years or less. Many Fed officials saw advantages in the latter strategy, because it would allow the central bank to shift into longer-dated debt during a downturn, something that would be helpful in supporting the economy at a time of low interest rates.

“Several participants viewed an MEP [maturity extension programme] as a useful initial option to address a future downturn in which the Committee judged that it needed to employ balance sheet actions to provide appropriate policy accommodation.”

There were, however, drawbacks associated with a portfolio focused on short-dated debt. Some policymakers, for example, are not convinced that extending the maturity of the Fed’s balance sheet is as effective as other tools such as rate cuts.

Fed officials also looked at alternative paths to getting to their final balance sheet portfolio — weighing up how quickly they wanted to make the transition. Several argued that decisions on the long-run composition of the portfolio need not be made for “some time”.

Additional reporting by Peter Wells in New York

Via Financial Times