Many Fed Officials Were Inclined to Keep Zero Rates Longer

Updated on
Many Fed Officials Saw Risks on Foreign Weakness

The Federal Reserve signaled its willingness to keep interest rates low for longer, given risks to the U.S. economy ranging from a stronger dollar to tepid wages and a sluggish housing market.

Many officials “indicated that their assessment of the balance of risks associated with the timing of the beginning of policy normalization had inclined them toward” keeping rates near zero “for a longer time,” according to a record of their Jan. 27-28 gathering released Wednesday in Washington.

Investors are now looking to congressional testimony next week by Fed Chair Janet Yellen for further clues to the timing of a rate increase after some Fed officials in recent weeks indicated a midyear move. The cautious tone of the minutes contrasted with a report a week after the meeting showing that payrolls rose more than forecast in January, capping the strongest three months of jobs growth in 17 years.

“The minutes definitely leaned dovish,” said Tom Porcelli, chief U.S. economist at RBC Capital Markets LLC in New York. “A June liftoff was dinged today to some extent, though it doesn’t mean it’s off the table.”

Officials also expressed concern that removing their vow to be “patient” on raising rates would lock them into a timetable for tightening, the minutes showed.

The dollar weakened and Treasuries advanced as investors pared bets the central bank will raise its benchmark interest rate as early as June.

Yields Drop

The Bloomberg Dollar Spot Index, a gauge of the currency’s performance against 10 major peers, declined 0.05 percent as of 4:00 pm in New York compared to the previous day’s close, after rising as much as 0.4 percent. Two-year Treasury yields sank six basis points, or 0.06 percentage point, to 0.60 percent.

The FOMC last month repeated its promise to be patient in considering the first rate increase since 2006, even as it described the labor market as “strong.”

The panel, while considering risks to the outlook to be “nearly balanced,” pointed to a strengthening dollar, international flash points from Greece to Ukraine, and slow wage growth as weakening the case for the first rate rise since 2006.

The minutes reflected an intense debate over the causes and consequences of an inflation rate that has lingered below the Fed’s 2 percent target for 32 months.

“A number” of participants said that with stable inflation expectations, “the fall in energy prices should not leave an enduring imprint on aggregate inflation.”

Narrow Range

The minutes said “it was pointed out” that the “recent intensification of downward pressure on inflation” was concentrated “in a narrow range of items in households’ consumption basket.”

Still, “several participants” saw “the continuing weakness of core inflation measures as a concern,” with a few suggesting that weakness in wage growth could delay a return to the 2 percent target.

Members also discussed their communication strategy at length.

“Many participants regarded dropping the ‘patient’ language in the statement, whenever that might occur, as risking a shift in market expectations for the beginning of policy firming toward an unduly narrow range of dates,” the minutes said. “Some expressed the concern that financial markets might overreact.”

Most officials expect to raise rates this year and are weighing encouraging news on growth and employment against too-low inflation to judge the correct moment for liftoff.

Divergent Views

While the panel’s Jan. 28 statement received unanimous backing from voting members, the minutes showed diverging views over when the first increase may be appropriate.

“Some observed that, even with these risks taken into consideration, the federal funds rate may have already been kept at its lower bound for a sufficient length of time, and that it might be appropriate to begin policy firming in the near term,” the minutes said.

The argument for raising rates sooner has been bolstered by unexpected labor-market strength. Non-farm payrolls rose by more than 1 million jobs from November through January. The economy grew 2.4 percent in 2014, the most in four years.

At the same time, a plunge in oil prices has kept inflation on check. Consumer prices as measured by the Fed’s preferred gauge rose 0.7 percent in December from a year earlier, and the rate has lingered below the central bank’s 2 percent goal since March 2012.

Fed Chair Janet Yellen has said the committee will want to be “reasonably confident” before it raises rates that inflation will move back up toward 2 percent over time.

Continuing Weakness

“Several participants saw the continuing weakness of core inflation measures as a concern,” the minutes said.

The minutes also noted that “tepid nominal wage growth, if continued, could become a significant restraining factor for household spending.”

FOMC members acknowledged that market-based measures of inflation expectations had declined in recent months.

“A number of participants emphasized that they would need to see either an increase in market-based measures of inflation compensation or evidence that continued low readings on these measures did not constitute grounds for concern,” the record of the meeting said.

A gauge of expectations for inflation starting five years from now, based on Treasury securities, dropped to as low as 1.75 percent last month, data compiled by the Fed show.

Global Risks

Policy makers also discussed risks to the global economy. In their last statement they added “international developments” to the list of issues they will take into account when determining when to raise rates, in addition to employment, inflation and financial markets.

Policy makers concluded that a number of developments “had likely reduced the risks to U.S. growth,” including foreign central banks adding accommodation. They said lower oil prices were “potentially exerting a stronger-than-anticipated positive effect” on global and U.S. growth.

Fed officials also identified potential risks. They expected the rising value of the dollar “to be a persistent source of restraint” on exports, and a few participants said the greenback may appreciate further.

China’s slowing economy was seen as a “factor restraining economic expansion in a number of countries,” the minutes show. Officials also cited continuing risks from “global disinflationary pressure,” tensions in the Middle East and Ukraine, and “financial uncertainty in Greece.”

China, Greece

The U.S. economy has been strengthening while other major economies have struggled. The European Central Bank, worried about outright deflation, last month announced a plan to purchase 1.1 trillion euros ($1.2 trillion) of bonds.

China, the world’s second-largest economy, also posted the slowest growth last year since 1990.

Fed officials are also monitoring Greece, where a new government could run out of money by March and be forced to choose between breaking election promises or abandoning the euro. The conflict between Ukraine and Russia is another source of concern to policy makers.

The FOMC is next scheduled to meet March 17-18.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE