By Lucy Ren
The majority of the participants at the January Federal Open Market Committee meeting leaned towards delaying the interest rate hike, according to the FOMC’s January meeting minutes released on Wednesday.
The Fed has kept interest rate near zero for six years in order to stimulate the economy.
“Many participants appeal to keeping the lower bound for a longer time,” BBVA Compass economist Shushanik Papanyan said.
According to the minutes, “several participants” noted that if the Fed were to raise the short-term interest rate too late, the stance of monetary policy would become “accommodative,” leading to “excessively high inflation.”
On the other hand, “many participants” observed “a premature increase in rates might damp the apparent solid recovery in real activity and labor market conditions.”
BBVA Compass estimates that the interest rate hike will take place in the third quarter of 2015. Papanyan said the minutes provided a “reassuring support” for keeping the estimation.
The committee also repeated the forward guidance of “can be patient” regarding when to start raising interest rates. The guidance was introduced in December by the FOMC.
“They are afraid of the possibility of a tightening financial condition once they drop the guidance,” Papanyan said. “And that’s something we should pay attention to at their next meeting.”
Participants at the meeting also saw “broad-based” improvement in labor market conditions over the intermeeting period, including “strong gains in payroll employment and a further reduction in the unemployment rate.”
“They are still debating about how much slack remains in the labor market,” said Scott Brown, chief economist at Raymond James & Associates. “For example, the stagnation of wages is an indicator of slack.”
The minutes showed that “a few observed that the combination of recent labor market improvements and continued softness in inflation had led them to lower their estimates of the longer-run normal rate of unemployment,” while “a few others” saw “only a limited degree of remaining labor underutilization or anticipated that underutilization would be eliminated relatively soon.”
On the global economic outlook, “many” participants voiced concern that “a deterioration in the foreign economic situation could pose downside risks to the outlook for U.S. economic growth,” the minutes showed. At the same time, “several” others saw those risks as “having diminished over the intermeeting period,” with the help of “lower oil prices and actions of foreign central banks” supportive of growth abroad.
However, “the increase in the foreign exchange value of the dollar was expected to be a persistent source of restraint on U.S. net exports,” the minutes said, “and a few participants pointed to the risk that the dollar could appreciate further.” China was noted as a factor “restraining economic expansion in a number of countries.”
Other continuing risks to the international economic outlook include “global disinflationary pressure, tensions in the Middle East and Ukraine, and financial uncertainty in Greece.”
Overall, the minutes said that the risks to the outlook for the U.S. economic activity and the labor market were seen as “nearly balanced.”
Inflation moved “further below the Committee’s longer-run objective.” Participants at the meeting generally anticipated that inflation would rise gradually toward “the Committee’s 2 percent objective,” as the labor market improved further and “the transitory effects of lower energy prices and other factors dissipated,” the minutes said.
According to a survey conducted by the Wall Street Journal, 50.75 percent of the economists being surveyed believe the Fed will make its first increase in the federal funds rate in the second quarter of 2015, down from 50.8 percent before the release of the FOMC minutes.
