WASHINGTON, D.C.: The Federal Reserve was split at its last policy meeting on when to raise ultra-low US interest rates, with timing ranging from June to 2016, according to minutes released on Wednesday (Thursday in Manila).
“Several participants judged that the economic data and outlook were likely to warrant beginning normalization at the June meeting,” said the report on the March 17 to 18 meeting of the Federal Open Market Committee (FOMC), the central bank’s policy arm.
Given the fall in energy prices and the stronger dollar, the other FOMC participants deemed the economy would not be able to weather a hike until later in the year. “A couple” said liftoff would remain unlikely until 2016, the minutes said.
At the meeting, the Fed left its key federal funds rate unchanged near zero, where it has been pegged since late 2008 to support the recovery from the Great Recession.
It dropped from its policy statement a line used previously saying it will remain “patient” before acting—sending a signal that a rate hike could come as early as June.
But the FOMC said it expected the timing would be appropriate when it had seen further improvement in the labor market and is “reasonably confident” that currently weak inflation will move back to its 2.0-percent target over the medium term.
The Fed has blamed tepid inflation on “transitory” factors, including the rapid dive in crude-oil prices since June.
The latest data available on the Fed’s preferred inflation measure, the “core” personal consumption expenditures price index, which excludes food and energy, showed a modest 1.4-percent increase in February from a year ago.
Hike possible before inflation rises
The participants discussed when it might be appropriate to begin to raise the interest rate, in the context of inflation likely to remain weak in the short term.
“The normalization process could be initiated prior to seeing increases in core price inflation or wage inflation,” the minutes said.
“Further improvement in the labor market, a stabilization of energy prices, and a leveling out of the foreign exchange value of the dollar were all seen as helpful in establishing confidence that inflation would turn up.”
The participants noted that economic growth had moderated since their January meeting, with slower consumer spending, a weaker housing market and the stronger dollar hampering exports.
The meeting came before a batch of weakening economic data, including the disappointing March jobs report last Friday that showed job growth of only 126,000 positions, half of what was expected and the worst month since December 2013.
“We expect that the Fed will soon see the evidence it needs to determine that March was an aberration,” said Paul Edelstein of IHS Global Insight.
“Meanwhile, thanks to the Fed’s delay in expected rate hikes and recent evidence that the eurozone is moving away from deflation, the ascent of the dollar appears to have stopped. This information certainly suggests that there is a fairly low bar for the Fed to raise rates in September, which remains our forecast.”