Interest rate increase was ‘close call’ for Fed
Policymakers fretted over pace of inflation at December meeting
The Federal Reserve’s decision to raise interest rates last month for the first time in nearly a decade was “a close call” for some officials, and the Fed agreed to move gradually the next few years to stoke low inflation and confirm it accelerates, according to minutes of the Fed’s Dec. 15-16 meeting released Wednesday.
For some officials, the decision to lift the Fed’s benchmark rate “was a close call, particularly given the uncertainty about inflation dynamics,” the minutes say.
The Fed raised its federal funds rate by a quarter percentage point to 0.4%, citing steady job growth and the fall in the unemployment rate to a near-nor- mal 5%. The funds rate has been near zero since the 2008 crisis.
Yet noting the recovery remains slow and inflation is still feeble, Fed officials said they likely would boost rates gradually. They projected interest rates will rise a percentage point a year and a bit more gently than they previously estimated. They stressed rate increases could be faster or slower, based on economic data.
The minutes reveal that policymakers wanted to proceed cautiously to help juice the labor market and inflation. And since inflation continues to run well below the Fed’s annual 2% target, “it would probably take some time for the data to confirm” that it’s drifting toward that goal.
That sheds light on the Fed’s assertion in its postmeeting statement that it will monitor actual progress on inflation before hoisting rates further. Previous statements had said officials must be “reasonably confident” of a faster rise in consumer prices.
While Fed Chair Janet Yellen told reporters that policymakers aren’t tied to a formula, the minutes show a pickup in inflation may be integral to future hikes.
Fed officials reiterated that inflation is being curbed by low oil prices and a strong dollar that makes imports cheap for U.S. consumers, factors they expect to soon dissipate. But “many” expect cheap oil to linger longer. For some, risks that inflation will stay low “remain considerable.”
Another reason to lift rates gradually is to assess how the economy responds, the minutes say. A cautious approach also minimizes the risk that the Fed will have to respond to a negative shock while its ability to do so is limited by a funds rate still near zero, the meeting summary says.
Risks posed by last summer’s global troubles “had receded,” officials said. But recent gloomy economic news on China has roiled markets and raised new questions about the pace of hikes.
The minutes show Fed officials projected interest rates will rise a percentage point a year and more gently than they previously estimated.