WASHINGTON, D.C.: Federal Reserve policymakers appeared willing to wait longer to begin raising rates, in the absence of any inflationary pressures, the minutes of the Fed’s January meeting showed on Wednesday (Thursday in Manila).
Many members of the Federal Open Market Committee (FOMC) were more concerned about moving too soon and stifling economic growth, especially given the troubled economies in Europe and Asia, the record showed.
They also generally saw continued slack in the US labor market, with no clear signs of upward pressure on wages that would suggest tightening.
The release of the FOMC’s January 27-28 policy meeting record quickly dampened expectations of an initial rise in the benchmark fed funds rate by June, with short-term Treasury bond yields dropping sharply, the dollar slipping and stocks rebounding from early losses.
The minutes showed the FOMC closely focused on how it would signal its first rate hike, after holding the fed funds rate at the zero level for more than six years, and then how to manage the initial fallout on markets.
That in itself confirmed that the Fed remains on course to begin “normalizing” monetary policy this year, as it has repeatedly signaled.
But with markets around the world focused on exactly when that will happen, the minutes showed the 10 FOMC members are mostly cautious about taking that first step.
While an unspecified number worried that the easy money policies of the Fed have gone on too long, more thought the US central bank could afford to move slowly.
“Many” FOMC participants indicated the environment “had inclined them toward keeping the federal funds rate at its effective lower bound for a longer time,” the minutes said.
Moreover, “many participants observed that a premature increase in rates might damp the apparent solid recovery in real activity and labor market conditions.”
They noted how inflation was falling away from its 2.0 percent target, despite the ultra-low interest rate, and that wages for the average worker remained flat despite strong job creation.
Since that meeting, the January jobs report came in very strong, but inflation has continued to sag. Earlier Wednesday the Commerce Department’s producer price index for January fell a sharp 0.8 percent from December, on the back of lower gas and food prices, and was absolutely flat over a one-year period.
FOMC participants also homed in on the impact on the United States of economic stagnation in Europe, Greece’s financial problems, slowing growth in China and turbulence in Ukraine and the Middle East.
Some participants were clearly worried about the potential for the strong dollar to rise even further, crimping the country’s exports.
The FOMC members were also concerned that their signalling of their intentions on rates had also begun to narrow their room to move.
In particular, they focused on the introduction in December of language in the FOMC policy statement that the Fed will be “patient” in beginning to normalize.
Subsequently Fed Chair Janet Yellen suggested that the word “patient” will be dropped from FOMC statements “a couple” meetings before a rate rise.
Many participants in the January meeting thought such an explicit sequence would lead to “an unduly narrow range of dates” for a rate increase, the
“The main takeaway from the minutes is that even if this key term is dropped, it won’t mean the Fed is poised to tighten as early as June,” said economist Sal Guatieri at BMO Capital Markets.