Most Federal Reserve policymakers believe inflation poses no current threat and that accommodative monetary policies should be maintained for the foreseeable future, according to minutes from the Fed’s meeting in June released Wednesday.
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“The vast majority of participants anticipated that, on average, both headline and core inflation would rise gradually over the next few years, and the majority of participants expected headline inflation to be at or slightly below the Committee’s 2 percent objective in 2016,” notes from the June 17-18 meeting of the Federal Open Markets Committee state.
The dry minutes belie an ongoing debate among Fed members over the timing and trajectory of interest rate hikes, part of the Fed’s “normalization” process while unwinding nearly six years of unprecedented stimulus initiated by the central bank in the wake of the 2008 financial crisis.
The FOMC voted in June to continue phasing out monthly asset purchases of Treasury bonds and mortgage backed securities, lowering the monthly amount to $35 billion. That program, known as quantitative easing, is expected to expire in the fall.
The next step in normalization is to raise interest rates from their current historically-low range of 0%-0.25%, where they’ve been held since December 2008.
Fed policy is currently being steered by so-called “inflation doves,” led by Chair Janet Yellen. The doves advocate keeping interest rates low for as long as necessary to ensure that the economy can stand on its own without monetary stimulus.
Mirroring past FOMC statements, the June minutes reflect that dovish position: “The Committee again stated that it currently anticipated that it likely would be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continued to run below the Committee’s 2 percent longer-run goal, and provided that longer-term inflation expectations remained well anchored.”
In other words, interest rates won’t be moving higher until the Fed sees inflation stabilize at its 2% target rate, and memebers don’t know when that’s going to happen.
Inflation, as measured by the Fed, has been running at about 1% annually, stoking fears among the dovish Fed members of deflation. Still, consumer prices on such everyday items as food and energy have shot higher in recent months, garnering attention from the Fed.
FOMC inflation hawks, among them Philadelphia Fed President Charles Plosser and Dallas Fed President Richard Fisher, fear that keeping interest rates too low for too long will lead to runaway inflation.
The June minutes reflect the Fed’s concern for communicating to financial markets and the general public their plans for normalization, without offering a specific timetable. More specifics could be offered before the end of 2014 if the Fed firms up its plans for raising rates.
“It was observed that it would be useful for the Committee to develop and communicate its plans to the public later this year, well before the first steps in normalizing policy become appropriate,” the minutes state.
The consensus among Fed members has been that rates will probably start to move higher in mid-2015.
Hedging its bets as always, the Fed’s minutes emphasize that last month’s discussion on eventually phasing out stimulus programs was “part of prudent planning and did not imply that normalization would necessarily begin sometime soon.”