Fed officials more upbeat about the economic outlook this year, minutes show

Federal Reserve officials and the central bank’s staff said the U.S. economy seemed stronger in late January than they had expected, according to minutes of their late-January meeting released Wednesday.

The risks to the outlook were more favorable than had appeared at their meeting in mid-December.

There were concerns expressed during their discussions about the threat of the coronavirus outbreak in China, and also of tensions in the Middle East.

Details of the coronavirus outbreak were limited at the time of the Fed meeting.

Fed Chairman Jerome Powell told Congress last week that the central bank was “carefully monitoring” COVID-19, the deadly virus that is also impacting production for AppleAAPL, +1.59% and other firms.

But what was striking was “cautious optimism” expressed about the business sector, which was stuck in the mud all last year.

The Fed staff’s projection for U.S. GDP growth was stronger at the January meeting than in the previous forecast. The staff also said that downside risks had diminished.

There was also some optimism about the outlook for inflation, which has lagged below the Fed’s 2% target.

Most Fed officials said they generally expected inflation to move closer to the central bank’s 2% target.

A couple of officials went further, saying they detected a “modest step up” in underlying inflation during 2019 and even that inflation might be at the target.

Despite the optimism, Fed officials were careful not to signal any change in interest rates.

The central bank cut rates three times last year and has signaled an on-hold policy stance, absent significant changes to the outlook.

In their discussion, Fed officials saw good reasons for leaving benchmark rates unchanged.

They discussed about how “maintaining the current policy stance for a time could be helpful in supporting U.S. economic activity in the face of global developments that have been weighing on spending decisions,” the minutes said.

The current degree of accommodation would also be useful in pushing inflation to the 2% target, officials said.

Many economists think the Fed will cut its benchmark rate later this year. They think the coronavirus will eventually cause a “material reassessment” at the central bank about the economic outlook.

Investors are pricing in roughly two quarter-point rate cuts by the end of 2020, according to the CME Group’s FedWatch tool.

Some analysts argue the market is just discounting risks of severe global weakness from the deadly epidemic.

U.S. equity benchmarks were higher Wednesday as China said it would help coronavirus-stricken businesses. The Dow Jones Industrial Average DJIA, +0.52%  was up 136 points in late morning trading.

The yield on the U.S. 10-year Treasury noteTMUBMUSD10Y, +0.11%  was little changed at 1.563%.

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