WASHINGTON, D.C.: Federal Reserve officials stressed “patience” in waiting to raise interest rates, worrying about weaker foreign economic growth and the stronger dollar, minutes of their September policy meeting showed on Wednesday (Thursday in Manila).
Participants at the Federal Open Market Committee meeting discussed their concerns about the stronger dollar amid stuttering growth in the eurozone, slowdowns in China and Japan and elevated geopolitical risks.
The greenback in particular had firmed against the euro, the yen and the British pound.
“Some participants expressed concern that the persistent shortfall of economic growth and inflation in the euro area could lead to a further appreciation of the dollar and have adverse effects on the US external sector,” the minutes said.
“Several” of them added “that slower economic growth in China or Japan or unanticipated events in the Middle East or Ukraine might pose a similar risk.”
There was no mention of the overseas growth or dollar concerns in the FOMC’s policy statement on September 17, in which the central bank left its zero interest rate unchanged since late 2008 and took another step toward winding up its massive asset-purchase program known as quantitative easing.
“The minutes appear less hawkish than anticipated, as there was concern about the health of the eurozone economy and the potential impact of an appreciating dollar on both US exports and inflation,” said Ryan Sweet of Moody’s Analytics.
The FOMC statement repeated the “considerable time” formula for an eventual rate hike after it winds up QE, expected after the October 28-29 meeting, although some officials wanted to drop the language.
According to the minutes, “The concern was raised that the reference to ‘considerable time’ in the current forward guidance could be misunderstood as a commitment rather than as data dependent.”
However, participants noted that the current formulation of the FOMC’s outlook “clearly indicated” that the committee’s policy decisions were conditional on its ongoing assessment of progress and expected progress toward the central bank’s dual mandate of maximum employment and 2.0 percent inflation.
Some meeting participants saw the current forward guidance as appropriate in terms of risk-management considerations, “which suggested that it would be prudent to err on the side of patience while awaiting further evidence of sustained progress toward the Committee’s goals.”
In the view of those officials, under current conditions raising rates could have greater downside shocks to the economy, as it makes a modest recovery, than boost it, the minutes said, because “it would be less problematic to remove accommodation quickly, if doing so becomes necessary, than to add accommodation.”
Fed Chair Janet Yellen, in a post-FOMC news conference, emphasized that a rate hike would be data-dependent, tamping down her earlier comment that it could come about “six months” after the Fed ends its asset-purchase program.
Markets reacted strongly to the Fed minutes that appeared to suggest a slower-than-anticipated approach to tightening credit. Wall Street stocks soared, with the blue-chip Dow Jones Industrial Average swinging up more than 200 points after scoring only an 80-point gain before they were released.
Barclays analyst Michael Gapen pointed out that the FOMC minutes, in addition to mentioning downside risks, revealed a mainly upbeat US economic outlook.
“We see nothing in the September minutes that leads us to alter our view that the committee will raise rates beginning in June of next year. This remains the case even though the risks to US growth from a weaker global growth outlook or a stronger dollar have risen since the September meeting.”