The Federal Reserve confirmed that being “patient” on interest rates means no increase before late April, while expressing concern that inflation might continue to linger below its goal.
Most members of the Federal Open Market Committee thought a patient stance “indicated that the committee was unlikely to begin the normalization process for at least the next couple of meetings,” according to minutes of the Dec. 16-17 gathering released today in Washington.
The minutes indicate broad support for Chair Janet Yellen’s assessment of the likely timing of the first interest-rate increase since 2006 that she delivered at a press conference following the meeting. Officials also discussed risks from overseas, including a plunge in oil prices, and concluded they were largely offset by domestic strength.
“The base case for policy remains that sometime in the middle of the year we should begin lifting off,” said Roberto Perli, a former associate director of the Fed’s Division of Monetary Affairs, who is now a partner at Cornerstone Macro LP in Washington.
The Standard & Poor’s 500 Index rose 1.1 percent to 2,024.00 at 2:51 p.m. in New York. The benchmark 10-year Treasury yield rose one basis point, or 0.01 percentage point, to 1.95 percent.
With the U.S. economy strengthening and unemployment at a six-year low, the FOMC in December dropped a pledge to keep interest rates low for a “considerable time.” The panel instead said it will be “patient.”
The minutes showed some Fed officials last month expressed concern about the outlook for inflation, which has remained below the central bank’s target for 31 straight months.
“A number of participants saw a risk that it could run persistently below their 2 percent objective, with some expressing concern that such an outcome could undermine the credibility of the committee’s commitment to that objective,” the minutes showed.
In its December statement, the FOMC said it expects inflation to move gradually back toward its target as the job market improves and the impact of cheaper energy dissipates.
In another echo of Yellen’s comments at her press conference, “it was noted that the Committee might begin normalization at a time when core inflation was near current levels, although in that circumstance participants would want to be reasonably confident that inflation will move back toward 2 percent over time,” according to the minutes.
The Fed’s preferred gauge, the personal consumption expenditures price index, rose 1.2 percent in the year through November. The core figure, which strips out volatile food and energy costs, rose 1.4 percent.
The minutes show some misgivings about the new guidance on interest rates.
“Some participants regarded the revised language as risking an unwarranted concentration of market expectations for the timing of the initial increase in the federal funds rate target on a narrow range of dates around mid-2015,” according to the record of the session.
Fed officials also said the faltering global economy may be a threat to the U.S., while concluding that those risks were “nearly balanced” by positive developments.
“Many participants regarded the international situation as an important source of downside risks to domestic real activity and employment, particularly if declines in oil prices and the persistence of weak economic growth abroad had a substantial negative effect on global financial markets or if foreign policy responses were insufficient,” the minutes showed.
Several policy makers said consumer and business confidence and payroll gains suggest the economy “may end up showing more momentum than anticipated,” while a few others said the boost to spending from cheaper oil and gas prices “could turn out to be quite large.”
Some officials worried the oil decline could reduce longer-term inflation expectations, while others were concerned a drop in market-based inflation measures might reflect that “such a decline had already begun.”
Even so, a couple of others said that if the jobless rate kept falling quickly, “wage and price inflation could rise more than generally anticipated,” according to the minutes.
Forecasts by FOMC members show most expect an initial increase in rates some time in 2015, though recent speeches indicate they differ on the precise timing.
San Francisco Fed President John Williams, who votes this year on the FOMC, said Jan. 5 he sees “no reason whatsoever to rush to tightening.” He said it would be reasonable to begin considering a rate increase in mid-2015.
Cleveland Fed President Loretta Mester said Jan. 3 rates could be lifted before mid-year. She and Williams each said the pace of tightening would be more important than the date of an initial increase.