July Minutes Show Fed Still Divided Over When to Raise Rates Again

(The Washington Post) —

Threats to the U.S. economy are fading, but officials at the nation’s central bank remain divided over when to raise interest rates again, according to documents released Wednesday.

The Federal Reserve had been closely watching financial turbulence around the world for signs that it might derail the recovery at home. But the minutes of its meeting in Washington last month show that officials were heartened by the resilience of the economy, particularly in the wake of Britain’s unexpected decision to leave the European Union.

Still, the documents show little consensus over the Fed’s next move. The central bank raised its benchmark interest rate in December for the first time since slashing it all the way to zero during the 2008 financial crisis. All year, officials have been debating whether to increase it again and have repeatedly decided to err on the side of caution.

One of the factors staying their hand is the low level of inflation despite substantial improvements in the labor market. Typically, economists expect prices to rise as more people find jobs and cash their paychecks. But the unemployment rate is now below 5 percent, and recent government data shows businesses are still hiring at a healthy clip. Yet inflation has persistently run below the Fed’s target of 2 percent, though recent readings have been more encouraging.

In their July meeting, most officials believed there was “relatively low risk” that inflation would shoot up even if the job market continued to improve, the minutes show, giving the Fed more flexibility in when to raise rates. Some officials went a step further, arguing that the Fed should not hike again until it is more confident that inflation will reach its target.

In addition, some officials pointed to the tepid rate of economic expansion as another reason to remain on hold. With the rates still so close to zero, the Fed has limited ability to counteract another recession through the traditional method of cutting interest rates. Therefore, they argued, the central bank should not raise rates until they are more confident that there is little chance of reversing course.

“The ‘wait and see’ theme is a recurrent theme,” UBS economist Drew Matus wrote in a note to clients. Officials “have gotten some supporting evidence regarding the health of the labor market, but inflation remains less robust than they would likely prefer to see. These factors argue for a slow path toward tightening.”

The Fed will meet three more times this year, and Matus predicted officials would not hike rates until their final gathering in December. The minutes released Wednesday gave no clear indication of the central bank’s timetable, and officials have emphasized that their decision will hinge on the evolution of the economy. If the data is better than expected, the Fed could move more quickly. But if it disappoints, the central bank may remain on hold.

Still, several officials have publicly suggested that the moment is drawing closer. New York Fed President William Dudley and Atlanta Fed President Dennis Lockhart recently supported the possibility of one rate hike this year. Kansas City Fed President Esther George dissented from the group vote in July, favoring an immediate increase.

In an interview last week, San Francisco Fed President John Williams argued that gradually raising rates soon would help mitigate the danger of abruptly increasing them later.

“We know that when U.S. monetary policy shifts directions and moves, it then has repercussions for the global economy, which then feeds back to the U.S. economy,” Williams said. “We don’t want to be the source of unneeded disruptions.”

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