By Jon Hilsenrath
WASHINGTON - Federal Reserve officials expressed glimmers of
trepidation as they decided at a mid-December policy meeting to
raise short-term U.S. interest rates after keeping them near zero
for seven years.
Though the decision to raise rates was unanimous, some officials
expressed concern about lingering low inflation and the stifling
effects on the U.S. economy of a strong U.S. dollar and slow growth
overseas.
"Because of their significant concern about still-low readings
on actual inflation and the uncertainty and risks present in the
inflation outlook, (officials) agreed to indicate that the (Fed)
would carefully monitor actual and expected progress toward its
inflation goal," the Fed said in minutes of its Dec. 15-16 policy
meeting released Wednesday.
Some officials said they wanted to see confirmation that
inflation was actually rising as they looked forward to additional
rate increases in 2016, the minutes said. Some also said it was a
"close call" as to whether they should move in December.
Inflation has run below the Fed's 2% goal for three-and-a-half
years.
The Fed tries to keep inflation near that goal, running neither
very high above it or very low below it, to diminish disturbances
to the economy. Persistent low readings since the financial crisis
suggest underlying weakness in overall economic activity, even
though employment has risen and the jobless rate declined.
In theory, inflation should pick up as joblessness falls and
slack in the economy diminishes. With that in mind, "nearly all" of
the Fed officials in the room at the meeting had become "reasonably
confident" inflation would rise in the months ahead, the minutes
said. Months earlier, the Fed had set out "reasonable" confidence
on inflation as a key benchmark for deciding to raise rates.
Still, officials pointed to factors that could throw their
inflation outlook off course: Additional declines in oil prices
could further weigh on inflation readings, as could continued
appreciation of the dollar.
"Although almost all still expected downward pressure on
inflation from energy and commodity prices would be transitory,
many viewed the persistent weakness in those prices as adding
uncertainty or imposing important downside risks to the inflation
outlook," the minutes said.
The Fed said at the meeting and reiterated in its minutes that
officials planned to move gradually toward additional interest
rates increases because of these and other uncertainties.
They have tentatively penciled in four rate increases in 2016,
according to projections they made public in December. The minutes
emphasized their intention to take a go-slow approach.
"A number of participants pointed out that because inflation was
still running well below the (Fed's) objective and the outlook for
inflation was subject to considerable uncertainty, it would
probably take some time for the data to confirm that inflation was
on a trajectory to return to 2 percent over the medium term," the
minutes said.
"Gradual adjustments in the federal funds rate would also allow
policymakers to assess how the economy was responding to increases
in interest rates."
The outlook wasn't all worrisome. Officials also pointed to
upside risks - notably that consumer spending might take off thanks
in part to the benefits to households of lower gasoline prices.
Overall, officials said the risks to the economy were balanced.
But staff economists had a somewhat more downbeat assessment. They
saw risks to growth as "tilted somewhat to the downside," risks to
unemployment as "skewed somewhat to the upside" and risks to
inflation as ""weighted to the downside." In other words, for each
metric the Fed watches -- inflation, unemployment and growth -- its
staff saw risks of economic underperformance.
Growth data have been disappointing of late and some analysts
have revised down their output estimates for the fourth quarter.
For example, Macroeconomic Advisers, a forecasting firm, has pushed
its estimate down from near 2% in mid-December to less than 1%.
Construction and trade data released this week have been soft.
If the economy under performs, the Fed could delay rate
increases. Likewise it could accelerate the pace of increases if
the economy surprises with robust growth in the months ahead.
The next big test for the central bank is Friday, when the Labor
Department releases its estimate of job growth and unemployment for
December.
Officials have penciled in four interest rate increases this
year. Its next meeting is Jan. 26-27, though a move that soon now
looks unlikely.
Despite the reservations expressed at the meeting, Federal
Reserve Vice Chairman Stanley Fischer, speaking on CNBC Wednesday,
said the market is underestimating how many interest rate increases
the central bank will undertake this year. Futures markets point to
two rate increases while Fed projections point to four.
This point was underscored by other Fed officials speaking
publicly this week.
John Williams, president of the San Francisco Fed and a
confidant of Fed chairwoman Janet Yellen, earlier in the week said
he could "easily see" the Fed raising rates three to five times
this year. He expressed little concern about stock market declines
earlier this week.
Loretta Mester, the Cleveland Fed president, speaking in San
Francisco, said the Fed's internal projections, which show four
increases this year, "give a good sense" of where officials expect
interest rates to go in the months ahead.
(END) Dow Jones Newswires
January 06, 2016 14:15 ET (19:15 GMT)
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