Minutes Show Fed Leaders Delayed Rate Hike Over Global RisksChristopher Condon
Federal Reserve officials put off an interest-rate increase in September because of growing risks, mainly from China, to their outlook for economic growth and inflation even as they continued to say they were on track to raise the target later this year.
Policy makers “agreed that developments over the inter-meeting period had not materially altered the committee’s economic outlook,” according to minutes of the Sept. 16-17 session of the Federal Open Market Committee, released Thursday in Washington. Nonetheless, “the committee decided that it was prudent to wait for additional information confirming that the economic outlook had not deteriorated.”
The FOMC noted that domestic economic conditions, including data on consumer spending and housing, had continued to improve, and the labor market had reached or was close to the committee’s long-run estimates for unemployment.
Still, concerns over China and its potential spillover to other economies “were likely to depress U.S. net exports” and cause further strengthening of the dollar, which could damp inflation in the U.S.
“Participants anticipated that the recent global developments would likely put further downward pressure on inflation in the near term,” the minutes said. “Compared with their previous forecasts, more now saw the risks to inflation as tilted to the downside.”
The stock market held gains and the dollar fell as investors saw little reason in the minutes to expect a Fed rate hike soon. The Bloomberg Dollar Spot Index slipped to a three-week low while the Standard & Poor’s 500 Index added 0.9 percent to end at its highest level since Aug. 20.
Details of the Fed’s deliberations come three weeks after policy makers decided against raising the benchmark interest rate for the first time since 2006 amid concerns over global growth and financial market turmoil connected to China. The central bank has held the federal funds target rate in a range of zero to 0.25 percent since December 2008.
“There was an implicit acknowledgment that they would have raised rates if not for the uncertainty” from overseas, said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey.
The decision to stay near zero was followed on Oct. 2 by a disappointing jobs report for September. Employers added 142,000 workers to non-farm payrolls in the month, lower than all estimates in a Bloomberg survey of 96 economists.
The minutes showed the committee held a lengthy discussion about how far they should attempt to push down unemployment even after recognizing labor resources had been “substantially reduced” in recent months. Some committee members pointed to remaining slack represented by part-time workers and those outside the work force.
“A number of participants noted that eliminating slack along such broader dimensions might require a temporary decline in the unemployment rate below its longer-run normal level, and that this development could speed the return of inflation to 2 percent,” the minutes said.
Fed Chair Janet Yellen made just that point in a Sept. 24 speech in Amherst, Massachusetts.
Fed officials also largely dismissed worries over recent drops in U.S. stock markets.
“Participants indicated that they did not see the changes in asset prices during the intermeeting period as bearing significantly on their policy choice except insofar as they affected the outlook for achieving the committee’s macroeconomic objectives,” they said.
Investors reacted to the September meeting by lowering the probability the Fed will hike before the end of the year to around 40 percent, from 64 percent the day before the Sept. 17 decision, according to pricing in federal funds futures contracts and based on an assumption that the effective fed funds rate will average 0.375 percent after liftoff.
The Fed’s international concerns in September were sparked by China’s surprise devaluation of its currency on Aug. 11. That roiled global financial markets and raised fears that the world’s second biggest economy may slow more than forecast.
The International Monetary Fund this week said a projected fifth straight year of slowing growth in emerging markets had prompted it to cut its outlook for global economic expansion in 2015 to 3.1 percent from 3.3 percent estimated in July.
China’s slowdown has already helped reduce prices for commodities worldwide, putting downward pressure on inflation in the U.S. The Fed’s preferred gauge of inflation rose just 0.3 percent in the 12 months through August and it has been below the central bank’s 2 percent target since April 2012.
The minutes were peppered with references to the dollar and the drag it would exert on both economic growth and inflation.
While most FOMC participants still expect to raise rates this year, there were signs that unanimity could fray if the outlook remains uncertain in the coming months. While some officials spoke of the costs to the economy of a premature lift-off, others highlighted the risks to inflation of a significant delay.