Members of the Federal Reserve’s rate-setting Open Market Committee are torn over whether and when to begin raising their benchmark interest rate that has been near zero for more than six years, minutes of the latest meeting released Wednesday show.
The minutes for the FOMC’s January 27-28 meeting suggest a conflicted committee, recognizing that financial markets expect the benchmark rate in June to finally go up for the first since December 2008. But weak inflation readings are giving pause to many members, who think it might be prudent to wait it out a bit longer.
The minutes said that “many participants observed that a premature increase in rates might damp the apparent solid recovery in real activity and labor market conditions, undermining progress” toward the Fed’s dual mandate of full employment and inflation in a range between 1 percent and 2 percent.
But delaying the so-called liftoff in June of the benchmark federal funds rate, which would raise borrowing costs across the economy, has its risks too, the minutes show.
“It was also suggested that maintaining the federal funds rate at its effective lower bound for an extended period or raising it rapidly, if that proved necessary, could adversely affect financial stability,” according to the minutes.
Transcripts of the actual Fed deliberations are delayed for five years so as to reduce the chance of political interference in the conduct of monetary policy. But the minutes for the January meeting, more so than most minutes in recent years, show how conflicted members are on when to begin raising rates.
“There is clearly no consensus on the committee about when and how quickly to raise interest rates and ‘many’ does not necessarily mean ‘majority,” said Paul Edelstein, director of financial economics for forecaster IHS Global Insight. “But ‘many’ is not a qualifier that has often been used in the minutes, so its inclusion this time seems significant.”
The tradeoffs suggested in the minutes are a return to normalcy and higher rates, possibly at the cost of slowing the economic recovery or allowing stubbornly low inflation that could lead to expectations of prolonged lower inflation. The cost of long-term borrowing depends greatly on inflation expectations since inflation erodes the dollar’s purchasing power.
The minutes stressed that members uniformly believed the decision on rates should be dependent on incoming data, although some members of the rate-setting committee want to see improvements in labor compensation as a sign that inflation is moving up and that rate hikes are warranted.
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