**MNI POLICY: Fed Minutes: Can Afford to be Patient; Infl Muted>

--Top Takeaways From Minutes Of the Dec 18-19 FOMC Meeting

By Jean Yung 

     WASHINGTON (MNI) - The following are the key points from the 

minutes of the Dec. 18-19 FOMC meeting released Wednesday:

     --With the economy evolving as expected and inflation pressures 

"muted," Fed officials concluded they "could afford to be patient about 

further policy firming." As they watch incoming data, they are most 

concerned with whether anticipated risks would unfold and "to what 

extent they would affect economic activity," as well as the effects of 

previous rate hikes that are still working their way through the 

economy. 

     --Several officials called for removing forward guidance on "some 

gradual rate increases" entirely over upcoming meetings and replace it 

with language emphasizing data dependence. Replacing the word "expects" 

with "judges" in that phrase was meant to be a first step in that 

direction. Adding the word "some" helped indicate that a "relatively 

limited amount of additional tightening likely would be appropriate." 

     --Officials generally revised down their projected policy path in 

December on tightening financial conditions but made little or modest 

revisions to their economic outlook. They interpreted volatile financial 

markets and stock declines in November and December as reflecting an 

increased focus on "tail risks" such as a sharp escalation of trade 

tensions or a possible signal of a significant growth slowdown in the 

future. But a couple officials said tighter financial conditions so far 

did not appear to be restraining economic activity. If that persists, 

the story may change. 

     --A few officials had favored delaying the December hike in favor 

of waiting and seeing how data develops amid financial market volatility 

and global growth uncertainty, especially in the absence of inflationary 

pressures. 

     --There is no immediate need to end the Fed's balance sheet 

reduction program as Fed portfolio managers viewed the bank reserve 

supply as "still ample." The effective fed funds rate had risen to just 

1 bp below IOER but banks were still willing to lend in repo markets, 

the New York Fed said. 

     --The Fed remains concerned about its control over interest rates, 

especially as the balance sheet shrinks, noting that the fed funds rate 

and other money market rates could become volatile. Officials view 

further technical adjustments to IOER or using the discount window as 

options for keeping the EFFR within the FOMC's target range, but 

commented that such tools "have limitations." Another option is to slow 

the runoff pace as the size of the balance sheet nears its longer run 

equilibrium size, but officials were wary it would be misinterpreted as 

a signal about the stance of monetary policy. Officials tasked staff 

with exploring new options. 

     --In continuing its discussion over the transition to a long run 

operating regime, the Fed also contemplated building in a "buffer" of 

reserves above the level deemed necessary to implement policy 

effectively, suggesting that the Fed may be willing to live with an even

larger balance sheet than previously anticipated. 

     ** MNI Washington Bureau: 202-371-2121 ** 

[TOPICS: MMUFE$,M$U$$$,MAUDR$]