'Patient' Fed Sticks To Mid-2015 Rate Hike Script
Posted 05:20 PM ET
Federal Reserve policymakers took note of an improving economy and fresh overseas risks as they met in December but seemed set on an interest rate... View Enlarged Image
Federal Reserve policymakers were reaching gingerly toward a normalization of interest rate policy in mid-2015 as the economy firmed in December, even as fresh risks arose, minutes released Wednesday revealed.
Economic growth had perked up to an even greater degree than originally expected, policymakers acknowledged, leading many to up their GDP forecasts at the Dec. 16-17 meeting.
Officials noted everything from "strong increases in manufacturing output" juicing industrial production to real personal consumption expenditures, which "appeared to be rising robustly."
Job growth was even seen as being vigorous enough to chip away at the "resource slack" in the labor market left behind by the Great Recession, long one of Fed Chairwoman Janet Yellen's biggest concerns. "The unemployment rate was expected to decline gradually and to temporarily move slightly below the staff's estimate of its longer-run natural rate," the minutes noted.
Still, the Fed faced a different landscape than the one they'd met to discuss two months earlier. Geopolitics and listless foreign economies were concerns.
U.S. Hot, Rest Of World Not
"Many participants regarded the international situation as an important source of downside risks to domestic real activity and employment, particularly if declines in oil prices and the persistence of weak economic growth abroad had a substantial negative effect on global financial markets or if foreign policy responses were insufficient," the minutes read.
Inflation, which has run stubbornly lower than the central bank's target of about 2%, decelerated further, prompting committee members to cut forecasts.
On balance, however, policymakers saw ample reasons to move toward raising interest rates in mid-2015. "The Committee also expected that inflation would rise gradually toward 2 percent as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate," according to the minutes.
Consumer expectations of inflation, often viewed as important as actual inflation, were seen as stable. Overseas downside risks were "nearly balanced by risks to the upside," the minutes read.
Participants revised down their expectations of how a strengthening dollar would impact GDP growth and exports. The dollar has hit new highs as central banks in Japan and the eurozone pledge fresh stimulus to revive their economies and investors weigh the likelihood of higher U.S. rates.
'Patient' For Now
Fed officials also appeared to agonize over precise language in their Dec. 17 public statement. As expected, they dropped language to keep interest rates near zero "for a considerable time." They replaced that with a pledge to be "patient," though three members dissented, for conflicting reasons. The minutes underscored that participants took "patient" to mean at least two more meetings before tightening started, a notion Yellen repeated in a later press conference.
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