Markets were hardly surprised when Federal Reserve officials agreed last month to raise benchmark interest rates for the first time in nine years. Yet for some policymakers, the decision was a “close call,” with expectations for economic growth far from certain.
At the center of the “unease,” as some policymakers described it in the record of their Dec. 15-16 meeting, were differing views on the potential path inflation could take. Core inflation has held well below the Fed’s 2 percent objective for more than 40 straight months, with few signs of climbing.
That weighed heavily on the minds of some on the Federal Open Market Committee. “For some members, the risks attending their inflation forecasts remained considerable,” the minutes from the meeting read, with policymakers citing the potential downward impacts of foundering oil prices and a strengthening dollar on inflation.
Yet the fact that inflation remained far below the Fed’s target — even as Fed officials grew increasingly concerned that gross domestic product might slip in coming months — didn’t deter the Fed from lifting rates last month.
In part, that decision reflects the pressure on the Fed to normalize historically low interest rates despite concerns that the economy hasn’t quite hit thresholds that policymakers previously set for monetary tightening. “Members agreed that the post-meeting statement should report that the Committee's decision reflected both the economic outlook and the time it takes for policy actions to affect future economic outcomes,” the minutes said.
“If the Committee waited to begin removing accommodation until it was closer to achieving its dual-mandate objectives, it might need to tighten policy abruptly, which could risk disrupting economic activity.”
The minutes also stressed gains in the labor market, not just for the month preceding the December meeting — which saw stronger-than-expected job growth — but for the entire preceding year. The headline unemployment measure slid to an even 5 percent in 2015, half of its 2010 peak.
Investors pore over the Fed’s minutes, which are released weeks after some meetings, for clues as to how economic fluctuations will affect future interest rate decisions. When the rate-setting committee met in mid-December, domestic risks stemming from global market dislocations of the third quarter “had receded,” the minutes said.
But as markets began the new year with gyrations that echoed the turbulence of mid-2015, the risks the Fed cited regarding inflation expectations — plunging energy costs and a strong dollar — have only increased. Following the release of the minutes, market expectations of the odds of a rate hike later this month edged down slightly, to 8 percent from 11 percent.
Yet for all the conflicting trends, the minutes revealed a growing confidence among Fed policymakers that inflation will return in coming years and the economy will continue to grow. Should their expectations hold, investors can expect “gradual” interest rate increases in the coming year, with Fed officials generally envisioning a benchmark rate of 1 percent by 2017.