Fed minutes show division over QE exit

FOMC divided over the risk of inflation

WASHINGTON: US central bankers are divided over the risk of inflation and disagree over the timing of interest rate hikes into next year, according to minutes of the last Federal Reserve meeting released on Wednesday.

Monetary policymakers were likewise split on the timeframe for winding down the Fed’s multi-trillion-dollar investment holdings, with some arguing the central bank should announce this within “a couple of months,” the minutes showed.

Some members of the Federal Open Market Committee (FOMC), which sets the benchmark US interest rate, also expressed concern that Wall Street stocks were overvalued and that years of loose monetary policy could create risks for financial stability.

The minutes recorded policymakers’ deliberations at last month’s meeting, when the central bank voted eight-toone to raise interest rates by a quarter of a point to a range of one-to-1.25% — a vote of confidence that the current economic expansion will continue.

Though the move had been signaled well in advance, the increase still puzzled some economists given the absence of mounting inflation in the world’s largest economy.

Closely watched gauges of price pressures have retreated in recent months despite record low unemployment, with job creation remaining robust but showing some signs of slowing.

The minutes released on Wednesday showed such concerns extended to the FOMC itself.

Most committee members felt the recent weak inflation was likely transitory — attributed to one-off decreases in the costs of mobile telephone plans and prescription drugs.

But “several participants expressed concern that progress toward the committee’s two percent longer-run inflation objective might have slowed.”

The committee’s projections call for steady interest rate increases through 2018 but some members at the meeting “were less comfortable with the degree of additional policy tightening through the end of next year” that the Fed’s June forecasts implied, the minutes showed.

Some committee members were also concerned that investors had not reacted to the central bank’s last three rate increases, with financial conditions remaining easy despite the rising cost of borrowing.

They said “equity prices were high,” meaning Wall Street was running too hot, when judged against standard measures for valuing companies.

This could argue against maintaining low interest rates, which could favour “a buildup of risks to financial stability,” the minutes said.

Wall Street has rallied repeatedly following the November election of President Donald Trump, with investors buoyed by hopes of tax cuts and slashed regulation — though such prospects have dimmed with major parts of Trump’s agenda mired in Congress.

Policymakers were also divided on when to unwind the Fed’s $4.5 trillion investment holdings of government debt accumulated in the wake of the 2008 global financial crisis.

The Fed had signaled earlier this year that it planned to end the policy of reinvesting the proceeds from maturing debt in yet more bonds, which could have a similar effect to increasing interest rates.

Fed members have agreed on a drawnout approach for doing this but the question of how soon to start divided the committee, according to the minutes.

Some policymakers wanted to announce the start “within a couple of months,” the minutes said, arguing that the public already expected this as a result of earlier statements from the central bank.

But others pushed for holding off on a decision “until later in the year,” saying that kicking off the process too soon could send the signal that the Fed had moved away from its current plan to tighten policy only gradually.

Following the release of Wednesday’s minutes, Fed funds futures markets maintained their prediction that the central bank would not increase rates again before December.

The rate-setting committee is next scheduled to meet to decide interest rate policy on July 25-26.