Meeting notes show Fed remains divided on long-term plans
While almost all members of the Federal Reserve voted to raise interest rates in June, the central bank remains divided over its longer-term plans as data continue to show that the economy is not vigorously responding to its rate increases, minutes from the Fed’s private June meeting reveal.
Even among Fed officials who supported increasing the benchmark interest rate in June, several “indicated they were less comfortable” with the Fed’s longer-term plan for raising rates, the meeting notes show.
The minutes also showed central bankers divided over precisely when to begin reducing the Fed’s balance sheet, a task that they have indicated they will begin before the end of the year. Some officials argued for beginning to shrink the balance sheet in the next few months, while others advocated waiting to see how the economy progresses.
The Federal Reserve chose to raise its benchmark interest rate by a quarter-point at the conclusion of the June 13-14 meeting, the third such increase in six months. The decision was nearly unanimous, with eight members of the committee voting in favor and only one voting against it.
The interest-rate increase was a vote of confidence in the economy. But economists and investors are increasingly questioning whether the economy is strong enough to warrant the Fed’s relatively ambitious pace of rate in-
v creases, as the Fed continues to forecast another rate change this year and three more rate increases each in 2018 and 2019.
Fed Chairman Janet Yellen has emphasized that the bank’s actions will hinge on the performance of the economy. Thus far, the Fed has not been dissuaded by lower inflation readings that suggest the economy may not be as strong as other economic indicators suggest. The Fed’s favored inflation measure, the core personal consumption expenditure index, grew just 1.4 percent at an annualized rate in May, below the rate that the Fed targets.
The minutes showed the Federal Reserve is focusing intently on this challenge, as it tries to walk an uncertain line between coaxing along a still-mediocre economy and preparing for the next potential
In their June meeting, Fed officials emphasized that the U.S. economy looks strong in many respects. The labor market is strengthening, while business investment and consumer spending appear to be recovering from recent lows. Most Fed officials expected the economy’s growth to rebound significantly in the second quarter.
Yet they also pointed to other measures of the economy that appeared less encouraging, including stubbornly low wage growth and inflation, and slower residential investment, auto sales, and spending by state and local governments.
Fed officials lowered their long-term projections for both inflation and the unemployment rate, while their projected path for interest-rate increases remained mostly unchanged.
As of Wednesday afternoon, markets were projecting
a 97 percent chance that the Fed would remain on hold when it meets again in July. Investors saw a nearly 20 percent chance of another rate increase in September, and a 60 percent chance of another rate increase or two by December.
In a news conference after the conclusion of the June meeting, Yellen attributed lower inflation in part to temporary factors, like one-off decreases in the prices for cellphone services and prescription drugs.
She said the is Fed eager to keep increasing interest rates at a gradual pace to avoid a situation in which it would need to raise rates more quickly to offset inflation, which could destabilize the economy. But she said Fed bankers would remain “attentive” to the fact that inflation continues to underperform their targets.
The lone dissenter to the decision was Minneapolis Fed President Neel Kashkari, who argued in a subsequent op-ed
piece that inflation doesn’t show signs of picking up soon.
“We don’t yet know if that drop in core inflation is transitory,” Kashkari wrote. “In short, the economy is sending mixed signals: a tight labor market and weakening inflation.”
The minutes from the June meeting noted that the Fed’s recent rate increases are beginning to be felt among some American borrowers, especially the less wealthy. The minutes noted that credit-card borrowing has become more expensive, especially for subprime borrowers, while lending standards for auto loans have tightened.
Yet even with the Fed’s recent rate increases, funding remains easy for most companies and individuals. In fact, the minutes noted, financial conditions have actually eased even as the Fed tightens its interest rates — the opposite of what rate increases are theoretically supposed to do.