Meet­ing notes show Fed re­mains di­vided on long-term plans

Northwest Arkansas Democrat-Gazette - - BUSINESS & FARM -


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

eco­nomic cri­sis.

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.

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