 "Fed minutes show some concern on economic outlook")
Janet L Yellen, the Federal Reserve chairwoman, marshalled a strong consensus among Fed officials for the momentous decision to raise the central bank's benchmark interest rate last month, but concerns among policy makers about the strength of economic growth could slow the march toward higher rates.
Officials are focused on the persistence of sluggish inflation. While rising prices are unpopular, central bankers see benefits in moderate inflation. But for almost four years, there has been less inflation than the Fed's 2 per cent annual target; some policy makers worry that higher interest rates will not help, according to an official account of the December meeting published on Wednesday.
For some of those officials, the decision to raise rates was a "close call," the meeting account said. It added that "many participants remained concerned about the downside risks attending the outlook for inflation." And it described general agreement among the 17 officials who make up the Fed's policy-making body, the Federal Open Market Committee, to keep a close eye on prices. By the time the Fed formally announced its December decision to raise interest rates, ending the seven-year period during which it held short-term rates near zero, the attention of investors had already shifted to the question of how quickly the Fed would raise rates a second time, and a third.
Fed officials forecast in December that they were likely to raise rates by one per centage point in 2016, most likely in four quarter-point increments. Referring to that prediction in an interview on CNBC Wednesday, Stanley Fischer, the Fed's vice chairman, said that "those numbers are in the ballpark." Not everybody is necessarily in line with that thinking, though. The meeting account, released after a standard three-week delay, did not address the issue directly, but its description of the internal debate underscored differences on the timing and frequency of future moves.
In particular, it raised the question of how much further Fed officials are willing to raise rates without clear evidence the pace of inflation is also rising.
Most Wall Street analysts predict the Fed will not raise rates at its next meeting, in late January, but they generally expect the Fed to raise its benchmark rate at the following meeting, in March.
Laura Rosner, an economist at BNP Paribas, said the minutes provided less information than she expected about the Fed's plans, but she still put the odds of a March increase at 80 per cent. She said she did not expect the questions about inflation to be resolved by then, but she wrote on Wednesday that "inflation data released leading up to the March meeting are unlikely to increase worries." Ms. Yellen and her allies have already demonstrated they are willing to raise rates despite the uncertainty.
Other analysts, however, said they were surprised by the Fed's emphasis on its inflation concerns.
"Given all their worries about inflation, it's a wonder they even hiked at all," wrote Michael Feroli, chief United States economist at JPMorgan Chase. "Absent from this discussion was any sense that further tightening in the labour market would bolster their confidence in the inflation outlook. Instead, they wanted proof: not only expected progress, but also 'actual' progress on their inflation objective."
Mr. Feroli said a March raise now depended, in his judgement, on data showing increased inflation.
The minutes described Fed officials as optimistic that the economy would continue its steady, but slow, growth this year. They generally predicted the strength of the domestic economy, fuelled by increased consumer spending, would outweigh the weakness of the global economy, which has limited foreign demand for American products.
They also expected growth to be strong enough to drive continued improvement in labour market conditions - fewer people without jobs, fewer people in jobs that they do not like and, perhaps most important, more workers able to obtain raises.
As employment increases and wages rise, the Fed expects inflation to rise more quickly, in keeping with a longstanding pattern. A majority of Fed officials, led by Ms. Yellen, view this pattern as sufficiently reliable that they decided to start raising rates before it actually happened.
"Nearly all participants were now reasonably confident that inflation would move back to 2 per cent over the medium term," the minutes said. And because the influence of monetary policy is gradual, they worried that waiting to raise rates would risk driving economic growth to unsustainable heights or fostering a speculative bubble.
The Fed, however, has repeatedly forecast that inflation would rise, and it has repeatedly been wrong. Some officials are concerned the central bank is once again overestimating the economy.
Lael Brainard, a Fed governor, has argued that her colleagues are underestimating the potential deflationary impact of global economic weakness. The minutes, describing this view, said a couple of officials "worried that a further strengthening of the labour market might not prove sufficient to offset the downward pressures from global disinflationary forces."
The Fed has taken comfort in the stability of inflation expectations, which show Americans have not changed their views about the likely level of future inflation. But that blanket has been fraying for some time. Measures of expectations derived from asset prices are far weaker than survey measures, and in recent months, some of the survey measures have also shown signs of declining.
The minutes said several officials expressed "unease" about that decline, while others saw benign explanations, arguing that lower oil prices, for example, were exerting an influence that would soon fade once the energy market stabilised and began to rise.
So far, that has not happened.
©2016 The New York Times News Service
