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 The minutes from the Fed's Jan. 27-28 policy-setting meeting,
released on Wednesday, show officials grappling to square solid U.S.
economic growth with the weakness in international markets as well
as worrying about falling inflation expectations in the United
States.
Fed officials debated the impact that stubbornly low inflation
measures were having on the central bank's confidence in moving
ahead with the rate hike plan, the minutes from the Federal Open
Market Committee meeting showed.
The central bank is targeting June as the month to begin raising
rates, Fed policymakers have indicated.
The minutes shed light on the depth of the Fed's inflation debate
and highlight the desire of policymakers to keep interest rates
lower for longer.
"I think it's probably much more dovish than anybody anticipated,
that's for sure," said Greg Peters, senior investment officer at
Prudential Fixed Income, referring to the minutes. "I think June is
going to be hard for them to move, but that's not to say they
won't."
In its January policy statement, the Fed gave a nod to turmoil in
markets across the globe, saying it would take "financial and
international developments" into account. It was the first time
since January 2013 that the Fed made an overt reference to overseas
economic events in its policy statement.
The minutes offered a more detailed view of the overseas concerns,
with policymakers noting how China's economic slowdown and tensions
in the Middle East and Ukraine posed downside risks to the U.S.
economic growth outlook.
The "international" reference in January led bond investors to
quickly bet that the Fed would wait longer to raise rates, but bond
yields have shot higher since early February. The surge showed that
investors were getting more comfortable with the expectation that
the Fed's initial rate hike would happen in June, on the back of
strong economic growth and jobs data.
The release of the minutes, however, tempered that view, as bond
yields fell after the 2 p.m. EST (1900 GMT) release.
"Clearly there are some more dovish members that feel the economy is
still not strong enough to support steady pricing, so that is
holding the Fed back from normalizing policy," said Alan Gayle,
senior investment strategist at Ridgeworth Investments.
CONFLICTING SIGNALS
Even though Fed officials agreed that U.S. economic growth was
strengthening, the minutes showed the central bank continuing to
struggle with whether it can move ahead with raising rates amid
falling inflation expectations.
"Several participants saw the continuing weakness of core inflation
measures as a concern," the minutes said, detailing the Fed's
internal debate over the conflicting signals sent by different
measures of inflation expectations.
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Though policymakers expect the recent bout of low U.S. inflation to
prove transitory, they also said the different measures of
expectations "needed to be monitored closely" for signs the public
or investors are losing faith in the Fed's ability to reach its 2
percent inflation target.
Fed officials have said they could being raising rates even if
inflation remains stuck at a low level, confident that economic
growth and job gains will eventually produce rising prices. They
also view the initial "lift-off" as the start of an extended,
years-long process in which rates will remain far below normal and
continue to boost investment and spending.
How to communicate when the Fed is ready to hike is another matter
its policymakers continue to struggle with.
The Fed repeated in January that it would be "patient" in deciding
when to raise benchmark borrowing costs from zero, where they have
been since late 2008, and acknowledged a decline in certain
inflation measures. Fed Chair Janet Yellen said in December that
being "patient" implied the Fed would not raise rates at least for
the next two meetings.
The minutes from the January policy meeting show that many of its
participants feared that dropping "patient" - whenever the time
comes - risks shifting market expectations of a rate hike to an
"unduly narrow range of dates."
The reference to the narrow range of dates suggests the central bank
is worried that when "patient" is dropped, investors will put too
much weight on its meaning, and financial markets will overreact.
Fed officials maintained in the minutes released on Wednesday that a
decision on when to raise rates would remain dependent on economic
data, though moving too early was cause for concern.
"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 committee's objectives,"
the minutes said.
The minutes also said many participants were inclined toward
"keeping the federal funds rate at its effective lower bound for a
longer time."
(Reporting by Michael Flaherty and Howard Schneider; Additional
reporting by Jonathan Spicer and the Americas Economics and Markets
Desk in New York.; Editing by Paul Simao)
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