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The Federal Reserve this afternoon released the discussion minutes from the FOMC’s most recent monetary policy meeting, the first of 2020. The meeting’s notes confirmed the narrative that has been laid out by Jerome Powell & Co. in recent congressional testimony and other public appearances.

Fed officials feel rates are likely to stay where they are, minutes show https://t.co/5JappD4K3s

— CNBC Now (@CNBCnow) February 19, 2020

• The committee in discussion agreed that the current stance of monetary policy is (as ever) “appropriate” for supporting continued growth in the US economy.
• The FOMC, at the end of January, saw the outlook as remaining favorable for growth.
• The possible downside risks of an extended battle to contain the Covid-19 virus were already becoming apparent to the committee.
• Many of the topics and views expressed in the FOMC discussion have investors and analysts seeing a dovish tint to the current “Fed pause.”

FOMC Minutes Recap

The detailed discussion minutes from the FOMC meeting that took place on January 28 & 29, with the added color of several public appearances by Fed officials and the Chairman’s regular congressional testimony in the time since, paint the picture of committee optimistic about the economic outlook for the US in near- to medium-term; but also one what was becoming aware of the growing risk posed by what at the time was still an emerging global health crisis. Many FOMC members said they were seeing promising signs of improvement in the economy’s growth, and that they were cautiously optimistic about the outlook for trade with the signing of the US and China’s “phase one agreement.” They also acknowledged a strong domestic labor market.

The committee members of course referred to the downside risks to their hopeful outlook that have been there for months: ultimate uncertainty for global trade despite their hopes, and persistently lagging inflation growth in the US as well as possible slowdown in household spending. But the most important acknowledgement of risk made by the FOMC is the economic risks the members knew that China’s coronavirus outbreak might present even in late January—as we know, the damage has become much more evident by now.

With all risks considered (at the time,) the FOMC seemed well-agreed on the utility of keeping interest rates at their current levels—not only because they create the right level of support for continued growth, but also because an extended period of time with rates set in place will allow the Fed to more fully assess the effects that 2019’s “mid-cycle” rate cuts have had on the economy.

In an echo of similar thoughts expressed by Fed Chairman Jerome Powell in his congressional testimony last week, there were several FOMC member who observed that the labor market, while looking strong, may still have some room to strengthen even further. This suggests that those voters (including the Chairman’s vote) would like to see rates remaining dovishly low-for-longer to allow the economy to get closer to “full employment.”

Finally—and in a slight counter to the dovish outlook for persistently low policy rates—there appeared for the first time to be more formal talk among some FOMC members about whether or not low rates are encouraging unnaturally risky behavior in markets that may lead to worrying instability. Were this to become a predominant concern on the committee—as it already is in many economic circles—we could see discussions at the Fed in the future about whether policy rates should need to be adjusted (that is, hiked) in order to limit instability risk.

Market Reaction

The dovish signals sent by the FOMC discussion minutes have obviously been the most clearly received to end Wednesday’s trading book of business. Excited about the prospect of more “easy money” for longer, all major US stock indices have gone on a tear since the minutes were released and parsed. At the same time, gold prices have profited from the expectation that lower interest rates for longer will continue to make the non-yielding yellow metal an attractive investment. Following a brief dip in value when the minutes were first released, as they have been digested gold spot prices are now trading higher than they were at lunchtime, closing the market day above the important psychological level of $1610/oz.