Fed On Track To Raise Rates Despite Weak Inflation, Minutes Show
By David Harrison
Most Federal Reserve officials believed at their meeting last month that they would likely raise short-term interst rates again this year, though some said their decision would hinge on whether inflation picks up in coming months.
The key question for policy makers is whether the recent soft patch in price increases is temporary or whether it reflects longer-lasting developments, according to minutes of the central bank's Sept. 19-20 meeting. Many officials at the meeting believed it was the former. If it's not, some indicated it would cause them to reassess the projected path of rate increases.
The minutes were released Wednesday after the usual three-week lag.
Several officials said their decision on another rate move this year "would depend importantly on whether the economic data in coming months increased their confidence that inflation was moving up toward the committee's symmetric 2% objective."
"It was noted that some patience in removing policy accommodation while assessing trends in inflation was warranted," the minutes said.
Others, however, were worried that holding off on raising interest rates too long could lead to a surge in inflation that would be difficult to control. High asset prices added to their concern, the minutes said.
Inflation over the previous 12 months has held steady at 1.4% for the past three months, according to the Fed's preferred measure.
The Fed raised rates in June to a range of between 1% and 1.25%.
Speaking in Cleveland on Sept. 26, Fed Chairwoman Janet Yellen conceded that weak inflation remained a "mystery." Although she continued to anticipate another 2017 rate increase, she made clear she was open to changing her mind.
"We will monitor incoming data closely and stand ready to modify our views based on what we learn," she said.
Some officials have said they see little risk on holding off on another move until inflation picks up again.
Earlier Wednesday, Chicago Fed President Charles Evans said he was "a little nervous" about raising rates again unless inflation moves up. Mr. Evans is a voter on the Fed's policy committee this year.
"I don't really see any harm in waiting longer just to take more stock of the inflation situation," he told an audience in Zurich.
Dallas Fed President Robert Kaplan, another voter, has also said he'd open-minded about another rate move this year.
Others, however, such as New York's William Dudley and San Francisco' John Williams are confident inflation will move up and are willing to move again, according to recent remarks.
As they have in other recent meetings, officials last month laid out possible explanations for the low inflation numbers.
One theory held that low inflation readings were a temporary phenomenon that would face over time. A second possibility is that technological changes have changed how businesses set prices, which could hold down infrlation. It could also be that globalization has pushed down price pressures in ways that are difficult to understand.
"It was noted that other advanced economies were also experiencing low inflation, which might suggest that common global factors could be contributing to the persistence of below-target inflation in the United States and abroad," the minutes said.
All in all, the minutes indicate officials have yet to reach a conclusion on inflation, which could add to the uncertainty surrounding monetary policy in the months ahead.
Officials in September also agreed to kick off the years-long process of shrinking the Fed's $4.5 trillion portfolio. The move had been anticipated for months and caused no major market reaction, as officials had predicted.
Markets "appeared to have a clear understanding of the committee's planned approach for a gradual normalization of the size of the Federal Reserve's balance sheet," the minutes said.