WASHINGTON—Federal Reserve officials at their mid-December meeting appeared comfortable holding interest rates steady in the months ahead.
Despite some recent economic improvements, officials said they still saw elevated risks of weaker-than-expected growth due to the global slowdown and U.S.-China trade tensions that prompted them to cut rates last year, according to meeting minutes released Friday.
The Fed cut its benchmark rate at three consecutive meetings between July and October to a range between 1.5% and 1.75%. Officials held the rate steady in December and indicated they felt no urgency to reverse those cuts anytime soon.
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Officials “discussed how 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,” the minutes said.
Fed Chairman Jerome Powell after the meeting said he would want to see a sustained upturn in inflation before raising interest rates.
While the minutes didn’t reveal a robust debate around that strategy, they showed officials were still more concerned about economic weakness abroad than inflation, which ran below the Fed’s 2% target last year.
Fed officials cut their benchmark rate in 2019 after raising it between 2015 and 2018. In addition to trade hostilities with China, the Fed has examined additional geopolitical risks, including protests in Hong Kong, the U.K.’s impending departure from the European Union and an attack on a Saudi oil field.
“Overnight events in Iraq are certainly a question mark, and oil prices are up a little bit, but I think we’ve got a pretty good, robust, resilient economy,” Chicago Fed President Charles Evans said Friday in a Bloomberg Television interview.
The central bank is also keeping close tabs on the broader economy’s resilience in the face of a continuing slowdown in factory activity. The Institute for Supply Management said Friday that its index for factory activity showed a contraction for the fifth straight month in December with the gauge sliding to the lowest level since June 2009, when the U.S. was exiting recession.
The minutes show the likelihood of a rate cut is higher than that of an increase, “but the path of least resistance is for the Fed to stay on hold,” said Michelle Meyer, an economist at Bank of America. “Fed officials seem very much to be on the same page, which is that monetary policy is appropriate. It’s accommodative, and that’s intentional.”
According to futures markets, investors placed roughly 62% odds Friday on at least one more rate cut by the end of this year, up from around 50% on Thursday, according to CME Group. The Fed’s next meeting is Jan. 28-29.
Until the escalation of hostilities in Iraq, markets had risen after the Fed’s Dec. 10-11 meeting. On Dec. 13, the U.S. and China announced the completion of a partial trade agreement.
In exchange for China agreeing to increase purchases of farm goods and other exports, the U.S. canceled new tariffs on roughly $156 billion in Chinese imports that had been set to take effect Dec. 15.
Fed officials are in the advanced stages of a year-long review of their policy-setting framework. Currently, the Fed seeks to keep inflation at around 2%, which it regards as a sign of healthy growth. But inflation has mostly held under the target since it was adopted eight years ago.
Excluding volatile food and energy prices, prices rose 1.6% from a year earlier in November, according to the Fed’s preferred gauge and last stood at the 2% target in December 2018.
Mr. Powell has signaled concern that inflation could drift lower if officials can’t credibly meet their goal after many years of prices holding below the target because households and businesses will come to expect still-lower inflation.
At last month’s meeting, officials “warned about the macroeconomic consequences of not achieving 2% on a sustained basis.” Some officials said even if recent inflation weakness proved temporary, longer-term inflation expectations were “too low.”
Officials also reviewed research showing how recessions tend to hit harder lower-income households with limited ability to borrow.
Because historically low interest rates leave the Fed with limited room to counteract a downturn, those findings “give them another reason to lean in the direction of keeping policy as accommodative as possible for as long as possible,” said Ms. Meyer.
The minutes showed a few Fed officials were worried that the Fed might encourage excessive risk taking in financial markets by holding rates at historically low levels for longer periods of time.
Write to Nick Timiraos at email@example.com