Fed Minutes Show Concern About Global Market Turmoilby
Oil drop, market turmoil, less global growth lift uncertainy
Tightening financial conditions amplify downside risks
Federal Reserve policy makers debating their outlook for interest rates last month expressed concern that the fall in commodity prices and the rout in financial markets increasingly posed risks to the U.S. economy.
“Participants judged that the overall implications of these developments for the outlook for domestic economic activity was unclear but they agreed that uncertainty had increased,” according to minutes of the Federal Open Market Committee’s Jan. 26-27 meeting released Wednesday in Washington. “Many saw these developments as increasing the downside risks to the outlook.”
Policy makers, who projected in December that they’d raise interest rates four times this year, are grappling with the fallout of market turbulence that has cast doubt over the economic outlook globally. Fed Chair Janet Yellen suggested in congressional testimony last week that the central bank could delay its plans for tighter policy to assess how the economy reacts to current headwinds.
The minutes go into more detail than the FOMC’s statement on policy makers’ concerns about the risks to the U.S. economy. While voting members “generally agreed” they couldn’t assess the balance of risks to the outlook in the statement, officials “observed that if the recent tightening of global financial conditions was sustained, it could be a factor amplifying downside risks,” according to the report.
Stocks rallied for a third day, with the Dow Jones Industrial Average rising more than 200 points, as the year’s most-battered shares continued to recover and energy shares climbed with oil prices.
Another part of the minutes indicated that a minority of policy makers judged that recent developments had “increased the level of downside risks or that the risks were no longer balanced.”
“While participants continued to expect that gradual adjustments in the stance of monetary policy would be appropriate, they emphasized that the timing and pace of adjustments will depend on future economic and financial-market developments and their implications for the medium-term economic outlook,” the minutes said.
Officials agreed that incoming labor-market indicators had been “encouraging,” while data on spending and production were “disappointing.”
The jobless rate fell to 4.9 percent in January and underemployment dropped to levels last observed before the collapse of Lehman Brothers Holdings Inc. Economic growth in the U.S. slowed to an annualized rate of 0.7 percent in the fourth quarter as households tempered spending and businesses cut back on capital investment and adjusted inventories.
“A number of participants were concerned about the potential drag on the U.S. economy from the broader effects of a greater-than-expected slowdown in China” and other emerging-market economies, the minutes said.
Policy makers noted that the further decline in energy prices and an additional appreciation of the dollar “likely implied that inflation would take somewhat longer than previously anticipated to rise” to 2 percent.
The Fed’s preferred gauge of prices has languished below that target for more than three years. The rate rose 0.6 percent in the 12 months through December, the fastest pace in a year.
“A few participants noted that direct evidence that inflation was rising toward 2 percent would be an important element of their assessment of the outlook and of the appropriate path for policy,” according to the minutes.
Yellen told U.S. lawmakers last week that monetary policy is “by no means” on a preset course, and any decision to change the federal funds rate target of 0.25 percent to 0.5 percent will be data dependent.
Investors weren’t pricing in any hikes in 2016 heading into Wednesday’s release of the minutes. Traders saw a 6 percent chance of a rate increase at the FOMC’s next meeting March 15-16, federal funds futures showed at 11 a.m. New York time.
The FOMC also discussed a proposal to add “fan charts” to quarterly economic projections to illustrate uncertainty around the forecasts, the minutes said. They reached no agreement, with some policy makers concerned that the charts would be “challenging for the general public to interpret” and raising questions including whether federal-funds charts would show the rate path potentially extending below zero.
Yellen asked the subcommittee working on the initiative to continue to look into the possibility of incorporating a graphical depiction of uncertainty into the projections, according to the minutes.
(Updates with stocks in fifth paragraph.)