Fed Officials Saw Global Slowdown Among Risks to Outlook

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Janet Yellen
Reporters at a news conference with Janet Yellen, chair of the U.S. Federal Reserve, following a Federal Open Market Committee (FOMC) meeting in Washington, D.C., on Sept. 17, 2014. Photographer: Andrew Harrer/Bloomberg

Federal Reserve policy makers last month worried that slowing global growth and a stronger dollar posed risks to the U.S. economy as they decided to maintain a pledge to keep interest rates low for a “considerable time.”

A number of officials said the U.S. expansion “might be slower than they expected if foreign economic growth came in weaker than anticipated,” according to minutes of the Sept. 16-17 Federal Open Market Committee meeting released today in Washington.

The minutes highlight growing concern among policy makers who say further gains in the dollar could hurt exports and damp inflation, which has undershot the Fed’s goal for more than two years. The Bloomberg Dollar Spot Index, which tracks the greenback against 10 major currencies, is up almost 6 percent since the beginning of July.

Stocks rose, sending the Standard & Poor’s 500 Index up the most this year, and the dollar weakened as investors speculated that caution over the economic outlook would lead the Fed to keep interest rates near zero for longer.

“They’re still in no hurry to start tightening,” said Jonathan Wright, an economics professor at Johns Hopkins University in Baltimore who formerly worked at the Fed’s division of monetary affairs. “Inflation is just too low.”

Spurring global growth will be on the agenda as finance ministers and central bankers gather in Washington this week for the annual meetings of the World Bank and International Monetary Fund. The IMF yesterday cut its global growth forecast for 2015 and warned about the risks of rising geopolitical tensions.

European Woes

At last month’s FOMC meeting, “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,” according to the minutes.

A stronger dollar hurts U.S. exporters by making their goods more expensive in overseas markets. It also makes foreign goods cheaper in the U.S., potentially widening the trade deficit and keeping a lid on inflation.

The S&P 500 rose 1.8 percent to 1,968.89 at the 4 p.m. close of trading in New York. The Bloomberg Dollar Spot Index was down 0.5 percent.

Regional Fed presidents, including Atlanta’s Dennis Lockhart, New York’s William C. Dudley and Chicago’s Charles Evans, have all said in the past month they are watching the dollar as officials debate the timing of the first interest-rate increase since 2006.

Rate Pledge

The FOMC last month retained a pledge to keep interest rates near zero for a “considerable time” after it concludes an asset purchase program that’s due to end after its October meeting.

“Some participants saw the current forward guidance as appropriate in light of risk-management considerations, which suggested that it would be prudent to err on the side of patience while awaiting further evidence of sustained progress toward the committee’s goals,” minutes of the gathering show.

“Not only are they not ready to raise rates, they don’t even want people to think they’re ready to raise rates, so it’s not even on the radar screen,” said Ward McCarthy, chief financial economist at primary dealer Jefferies Group LLC in New York.

At the same time, “the concern was raised that the reference to ‘considerable time’ in the current forward guidance could be misunderstood as a commitment rather than as data dependent,” the minutes said.

Some officials have said dropping the pledge would offer more flexibility to react to new economic data. Dallas Fed President Richard Fisher and Philadelphia’s Charles Plosser both dissented against the September FOMC statement.

Financial Stability

The minutes showed there was a discussion on financial stability and developments including a deterioration in leveraged lending standards, stretched stock market valuations, and compressed risk spreads.

Since last month’s FOMC statement, the September jobs report has shown that a labor-market rebound continues, with a 248,000 gain in payrolls last month after a 180,000 increase in August that was bigger than previously estimated. That pushed unemployment down to a six-year low of 5.9 percent.

While the labor market is healing, officials continue to express concern that inflation is too low. Prices as measured by the personal consumption expenditures index rose 1.5 percent in August, below the Fed’s 2 percent target.

While most participants at the Fed meeting thought inflation would move gradually toward the Fed’s goal, a couple said it was possible that “domestic inflation might be held down by persistent disinflation among U.S. trading partners and further appreciation of the dollar,” the minutes showed.

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