The Fed: Fed minutes show central bank uncertain about the pace of interest-rate hikes
Federal Reserve officials saw the possibility that they might have to raise interest rates faster than the “gradual” pace that they have stressed for some time, according to minutes of the December meeting released Wednesday.
The account of the meeting suggest the era of a predictable and boring U.S. central bank may be over.
By a unanimous vote on Dec. 14, the Fed raised its federal-funds range by a quarter-percentage point to 0.50%-0.75%, its second rate increase in a decade. At the same time, Fed officials said economic conditions will warrant only “gradual increases” in the federal-funds rate. In the so-called dot plot, Fed officials penciled in three quarter-point rate increases in 2017 instead of two seen in September.
Minutes of the meeting show many Fed officials thought this gradual policy path was under threat.
“Fed officials pointed to a number of risks that, if realized, might call for a different path of policy than the currently expected,” the minutes said.
U.S. stocks saw little reaction to the latest Fed minutes, after the Dow Jones Industrial DJIA, +0.32% closed Tuesday with a nearly 27% advance from its February lows.
The biggest risk was that the unemployment rate might drop sharply below the 4.5% jobless rate viewed as the “longer-run normal” level below which might spark inflation.
The unemployment rate is almost at that level having dropped to 4.6% in November.
“Many” Fed officials judged the risk of a “sizable undershooting” of the normal jobless rate “had increased somewhat and that the Federal Open Market Committee might need to raise the federal-funds rate more quickly than currently anticipated to limit the degree of undershooting and stem a potential buildup of inflationary pressures,” according to the minutes.
Some Fed officials saw this as a modest risk” and said that a “modest undershooting” of the unemployment rate might help return inflation to the Fed’s 2% target. But this seemed to be a minority view.
“Several” Fed voting members “noted that if the labor market appeared to be tightening significantly more than expected, it might become necessary to adjust the FOMC’s communications about the expected path of the federal funds rate, consistent with the possibility that a less gradual pace of increases could become appropriate,” the minutes said.
A couple of officials wanted to do away with the Fed’s “gradual” rate hike pledge altogether.
“Several” Fed officials noted that a faster pace of rate increases “could also have implications” for the Fed’s $4.5 trillion balance sheet.
Chairwoman Janet Yellen has said the Fed would hold the balance sheet steady by reinvesting proceeds of maturing Treasury securities and principal payments from mortgage-backed securities until “the process of normalization of the federal funds rate is well underway.”
“It was too early to know” what President-elect Donald Trump’s fiscal policy might entail, and how this might alter the economic outlook, Fed members said.
Almost all Fed officials indicated that upside risks to their growth forecasts had increased as a result of prospects for “more expansionary fiscal policies in coming years.”
All in all, “many participants emphasized that the greater uncertainties about these policies made it more challenging to communicate to the public about the likely path of the federal funds rate,” the minutes said.