WASHINGTON, D.C. — The Federal Reserve saw U.S. economic conditions “approaching” the point of being able to weather an increase in near-zero interest rates at July’s policy meeting, the meeting minutes showed Wednesday.
Fed officials pointed to slack in the job market and worried about China’s economic slowdown as they considered raising borrowing costs for the first time in more than nine years, according to the record of the Federal Open Market Committee (FOMC) meeting.
“Most judged that the conditions for policy firming had not yet been achieved, but they noted that conditions were approaching that point,” the minutes said.
The FOMC, as expected, decided at the July 28-29 meeting to hold unchanged the benchmark federal funds rate at the zero level, where it has been pegged since late 2008 to support the U.S. economy’s recovery from the Great Recession.
A series of mixed U.S. economic indicators since the meeting has clouded the outlook for a rate hike, which Fed Chair Janet Yellen earlier signaled was on track for some time this year.
Some experts say a hike at the FOMC September 16-17 meeting is likely because the economy overall looks strong enough, while others bet the Fed will want to wait to have more data before tightening credit. The minutes of the FOMC meeting did not reveal any hints about the timing of the liftoff, which has global financial markets on edge because it could derail the fragile recovery.
Instead, the minutes showed participants remained divided over when to make the move. Some participants emphasized the economy had made “significant progress” over the past few years and viewed conditions for a rate hike “as having been met or were confident that they would be met shortly.”
A “couple” worried that an appreciable delay in hiking would result in an “undesirable increase in inflation” or otherwise hurt financial stability.
One official ready to hike
“One member, however, indicated a readiness to take that step at this meeting but was willing to wait for additional data to confirm a judgment to raise the target range,” the minutes said.
Participants at the meeting generally agreed that job market conditions had improved. But “several” officials noted that “some noticeable margins of slack remained,” including a high share of employees working part time because full-time jobs were not available.
“Some participants” said they did not have enough information to make them “reasonably confident” that tepid inflation would move back to the Fed’s 2.0% target over the medium term, a key element of the Fed’s dual mandate of price stability and maximum employment.
The minutes also noted “another concern” was raised related to the risk of premature tightening, at a time when the Fed has limited ability to offset negative shocks to the economy and inflation with the fed funds rate at its ultra-low level.
The slowdown in China, the world’s second-biggest economy, and a bout of financial turmoil as Chinese equities tumbled, also troubled Fed policy makers, the minutes showed.
“While the recent Chinese stock market decline seemed to have had limited implications to date for the growth outlook in China, several participants noted that a material slowdown in Chinese economic activity could pose risks to the U.S. economic outlook,” the minutes said.
The FOMC meeting came before China’s shock devaluation last week of the yuan, which many observers saw as a sign that its economy is in worse trouble than thought.
Moody’s Analytics analyst Ryan Sweet said the minutes confirmed that a September rate hike remained possible, but was “not a slam dunk, and we believe the odds have diminished over the past couple of weeks.”
By Veronica Smith
Copyright Agence France-Presse, 2015
