Federal Reserve policymakers who met in December expressed concern about weakness overseas but were upbeat enough about the U.S. economy and impact of lower oil prices to prepare for a likely interest-rate hike sometime this year.
Minutes of the Fed’s Dec. 16-17 meeting released Wednesday show that Fed officials believed stagnant global growth posed one of the biggest downside risks to the U.S., particularly if it triggered turmoil in global financial markets or if any policy moves abroad proved ineffective.
“However, the downside risks were seen as nearly balanced by risks to the upside,” the minutes said.
Officials noted the robust improvement in job growth, as well as consumer and business confidence. Several board members said the economy “may end up showing more momentum than anticipated,” while others “thought that the boost to domestic spending from lower energy prices could turn out to be quite large,” according to the minutes.
While they generally agreed on the direction of the U.S. economy, board members held a spirited debate over how best to word the Fed’s intentions. In the end, they decided to update its policy statement by saying it would be “patient” in moving toward a rate hike.
Officials also indicated that they might be willing to raise rates even if inflation hovers below the Fed’s 2 percent target, especially given that falling energy prices and a stronger dollar would keep prices muted for “some time.”
The minutes stressed that the timing of the Fed’s rate hikes would be dependent on incoming economic data, although its choice of the word “patient” suggests that a rate hike is unlikely for at least the next two meetings, the minutes stated. That was a point also made by Fed Chair Janet Yellen at a news conference following the December meeting. The next gatherings are scheduled for later this month and in March.
The minutes were released with the customary three-week delay. At the meeting, the Fed added that its new language was consistent with its previous guidance that it would keep rates low for a “considerable time.”
Many economists believe that the Fed will not start raising rates until June.
The central bank has kept its benchmark rate near zero for six years since reducing it to a record low in December 2008, when the country was in the grips of the Great Recession and the Fed was struggling to keep the banking system from collapsing during the financial crisis.
The Fed’s policy statement last month was approved on a 7-3 vote. The three dissents underscored divisions inside the Fed as it transitions from an extended period of ultra-low rates to a period in which it will start to raise rates.
The dissents included regional bank presidents Richard Fisher of the Dallas Fed, Charles Plosser of the Philadelphia Fed and Narayana Kocherlakota of the Minneapolis Fed.
Fisher objected because he believed the improving economy warranted an interest-rate hike sooner than the statement suggests, according to the minutes. Plosser dissented for similar reasons. He believed the Fed’s statement should have included the possibility of an interest-rate hike in the first quarter. Furthermore, he worried about the risk of waiting too long to raise rates.
Kocherlakota, the minutes said, dissented because he felt the policy statement should have emphasized the need to raise inflation from its low levels. Over the past year, overall inflation has risen 1.3 percent.
In October, the Fed ended its third round of bond buying, which had been intended to keep down long-term borrowing rates. Those bond purchases have boosted the Fed’s investment holdings to close to $4.5 trillion – more than four times the level when the financial crisis hit in the fall of 2008.