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Fed Minutes Provide Insight Into Decision To Adopt Patient Approach

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Investors were provided with further insight into the Federal Reserve's decision to change the forward guidance language and indicate a patient approach to raising interest rates in the minutes of the central bank's January monetary policy meeting.

The minutes released Wednesday described the Fed's discussions regarding changing the language in its statement from referencing "further gradual increases" in rates to a sentence indicating patience.

Meeting participants pointed to a variety of considerations that supported a patient approach to monetary policy as an appropriate step in managing various risks and uncertainties in the outlook.

The Fed said additional data would help policymakers gauge the trajectory of business and consumer sentiment, whether the recent softness in core and total inflation and inflation compensation would persist, and the effect of the tightening of financial conditions on aggregate demand.

Information arriving in coming months could also shed light on the economic impact of the prolonged government shutdown as well as the results of budget negotiations occurring in the wake of the shutdown, including the possible implications for the path of fiscal policy, the Fed said.

"A patient approach would have the added benefit of giving policymakers an opportunity to judge the response of economic activity and inflation to the recent steps taken to normalize the stance of monetary policy," the minutes said.

The minutes said a patient posture would also allow time for a clearer picture of the international trade policy situation and the state of the global economy to emerge.

In light of a range of uncertainties associated with global economic and financial developments, the Fed also decided that it was not useful to express a judgment about the balance of risks.

However, many participants observed that if recent uncertainty eases, the Fed would need to reassess the characterization of monetary policy as "patient" and might then use different statement language.

The minutes of the January meeting also showed officials discussed a plan to end the reduction of bonds on the Fed's balance sheet before the end of 2019

"Almost all participants thought that it would be desirable to announce before too long a plan to stop reducing the Federal Reserve's asset holdings later this year," the Fed said.

The central bank added, "Such an announcement would provide more certainty about the process for completing the normalization of the size of the Federal Reserve's balance sheet."

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