FOMC Minutes Sap Confidence in Fed's 2015 Rate Hike Resolveby and
Economists worry Fed will keep finding excuses to delay
Minutes show FOMC stuck to outlook, yet balked over risks
Many economists still take Federal Reserve policy makers at their word and predict the central bank will raise interest rates this year. Yet, even their confidence was shaken a bit on Thursday after the Fed released the minutes of its most recent policy meeting.
“We’re still in the camp of December,” said Thomas Costerg, a senior economist at Standard Chartered Bank in New York. "For now we’re going to trust them, but they seem to find a lot of excuses each time” not to raise rates.
Minutes of the Sept. 16-17 Federal Open Market Committee meeting showed officials were feeling pretty good about the U.S. economy. Unemployment had fallen faster than they anticipated, consumer spending was picking up and the housing market was showing encouraging signs. Headwinds keeping inflation well below the Fed’s 2 percent goal, like lower oil prices and a strong dollar, were firmly judged to be transitory. All systems go.
Yet the solid reading on the domestic economy was darkened by threats from abroad. China’s slowing growth, which could spill over to other emerging market economies, raised risks the dollar might strengthen further, making U.S. exports more expensive in foreign markets and creating an additional drag on the economy. That didn’t change the committee’s outlook for growth and inflation in the U.S., just their views on the “risks to the outlook.” And in the end, caution carried the day.
“The committee decided that it was prudent to wait for additional information confirming that the economic outlook had not deteriorated,’’ the minutes said, even as they noted that most Fed officials believed conditions would merit a hike later this year.
"They were really prepared to go, but they had just enough hesitancy based on the data and the news from abroad that they decided to hold off," said Terry Sheehan, an economic analyst at Stone & McCarthy Research Associates in Princeton, New Jersey.
Some economists and market participants had already stopped believing the Fed will pull the trigger this year on the first rate increase in almost a decade. For them, the minutes bolstered that view.
“The Fed’s credibility is already in tatters,” Stephen Stanley, chief economist at Amherst Pierpont Securities LLC in Stamford, Connecticut, wrote in a note to clients. “Market participants have concluded that the Fed is going to find an excuse to extend super-accommodative policy for a very long time.”
Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York, is still calling for a December move but didn’t find much reassurance in the minutes for that assessment.
“Relative to our December call, the tone of these minutes increases the risk of a later liftoff,” he wrote in a note to clients.
Feroli also focused on language in the minutes suggesting that voting members of the committee were somewhat less inclined to hike than the full FOMC, where 13 of 17 members in September forecast a rate hike by year’s end, according to projections that they prepared for the meeting.
“Among those voters, ‘many’ expected the conditions for liftoff to be met later this year,” Feroli wrote. ”Many, but not most.”
All members of the Fed’s Board of Governors in Washington -- of whom there are currently five -- have permanent votes on the FOMC, as well as the head of the New York Fed. Four other regional Fed presidents vote on an annually rotating basis.
“It seems they wanted to emphasize their intent to move before year end,” Costerg said. “Still, I have this feeling it’s a horse that doesn’t want to jump the hurdle.”
For more, read this QuickTake: The Fed’s Countdown