Federal Reserve officials are looking for a new way to reassure investors that they are not ready to start raising interest rates, according to an account of the most recent meeting of the Fed's policy-making committee released on Wednesday.
The Fed, pleased that the economy is improving and more Americans are finding jobs, plans to finish its latest bond-buying campaign at the end of October. But most officials at the September meeting said that they were far from satisfied with the economy's progress. And the account said some officials expressed concern that the slow growth of other major economies would start to weigh on the US.
The Fed sees a need to replace its guidance that it plans to keep short-term rates near zero for a "considerable time" after the end of its bond-buying campaign. The account suggests that officials are trying to find a new way to say the same thing. Most officials want to preserve the general perception that a first increase is most likely around the middle of the year. But they also are going out of their way to emphasise that the timing could change if job growth either exceeds or disappoints their expectations.
"The consensus view is that liftoff will take place around the middle of next year," William C Dudley, the president of the Federal Reserve Bank of New York and the influential vice chairman of the Fed's policy-making committee, said on Tuesday. "That seems like a reasonable view to me. But, again, it is just a forecast. What we do will depend on the flow of economic news and how that affects the economic outlook."
Investors appeared to welcome the cautious tone. Stocks rose sharply after the Fed released the account at 2 pm. The Standard & Poor's 500-stock index closed at 1,968.89, up 1.8 per cent for the day. The interest rate on the benchmark 10-year Treasury bond fell to its lowest level in more than a year, closing at 2.32 per cent.
The account, along with speeches by Fed officials in the three weeks since the meeting, show that the central bank is playing for time as it seeks greater clarity about the economy. Patience has become the Fed's new watchword.
Job growth has been relatively strong this year, and the unemployment rate is fast falling toward what the Fed regards as a normal level. The economy added 248,000 jobs in September as the unemployment rate fell to 5.9 per cent. But inflation has been relatively weak. That's a problem in its own right; moderate inflation would encourage borrowing and spending and facilitates economic adjustments. The absence of wage inflation also suggests that the labour market is still slack and that most workers have little leverage to demand higher pay.
The growth of other large economies is also lagging that of the US, and some of those countries are pushing to devalue their currencies. Some Fed officials at the meeting expressed concerns these trends could undercut exporters and further suppress inflation.
The Fed's staff reported it did not expect inflation to rise to the Fed's preferred 2 per cent annual pace within the next several years.
"Some participants expressed concern that the persistent shortfall of economic growth and inflation in the euro area could lead to a further appreciation of the dollar and have adverse effects on the U.S. external sector," the account said. "Several participants added that slower economic growth in China or Japan or unanticipated events in West Asia or Ukraine might pose a similar risk."
Most officials also agreed that problems in the labour market remain "significant," citing the depressed rate of labour force participation and the unusually large proportion of part-time workers, along with the low rate of wage inflation.
The Fed appears to be moving closer to dropping its "considerable time" language, which is widely interpreted as meaning at least six months; most officials at the September meeting said they wanted to eliminate any reference to a timeline, and instead describe the decision as dependent on progress in increasing employment and raising the sluggish pace of inflation.
This steady course has frustrated Fed officials who say the Fed should retreat more quickly, two of whom dissented at the committee's September meeting.
More recently, however, frustrations have appeared greatest among the group of Fed officials who worry the central bank may retreat too soon. Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis, said on Tuesday that if the economy maintained its present trajectory, it would be "inappropriate" to raise rates at any point during 2015. Charles L. Evans, president of the Federal Reserve Bank of Chicago, spoke in the same key on Wednesday, warning that, "I believe that the biggest risk we face today is prematurely engineering restrictive monetary conditions."
An important unknown is the extent of slack remaining in the labour market. The Fed's chairwoman, Janet L. Yellen, and her supporters appear inclined to wait in the hopes that the data will help clarify the issue. Historically, wages and prices start to rise as the unemployment rate falls below 6 percent, as it has now done. If inflation instead remains sluggish, that would suggest a need for maintaining the Fed's stimulus.
The willingness to wait is fortified by a sense that the risk of pulling back too soon, and leaving people without jobs, is greater than the risk of pressing too hard even if that means pushing inflation temporarily past the optimal level.
Furthermore, Mr. Dudley said on Tuesday that he saw relatively little chance that economic growth would accelerate. The economy may be improving, but even the best case remains disappointing.
©2014 The New York Times News Service
