Federal Reserve Discusses Tools, Strategies for Rate Hike, Meeting Minutes Show

The Federal Reserve Board’s policy-setting committee, after concluding the U.S. economy is recovering at a “solid pace,” strategized at its January meeting about specific tools for smoothly initiating an interest rate hike.

In addition, the members of the Federal Open Markets Committee (FOMC) discussed the importance of communicating those tools and guidance on policy normalization to the public, according to minutes from the Jan 27-28 meeting.

Most analysts are predicting a mid-2015 rate liftoff, and nothing in the January minutes suggests otherwise.

As they discussed the language for their meeting statement, FOMC members “generally agreed that they should acknowledge the solid growth over the second half of 2014 as well as the further improvement in labor market conditions over the intermeeting period.”

Monthly job gains have been well in excess of 200,000 for months and the unemployment rate has fallen to its lowest level since before the 2008 financial crisis.

At the same time, the FOMC members acknowledged that downward pressure on inflation has increased lately as energy prices have tumbled since mid-2014. But the policy makers shrugged off these dynamics as temporary and held to their long-held predictions that inflation will “gradually” rise to the Fed’s 2% target rate over the “mid-term.”

“A number of participants observed that, with anchored inflation expectations, the fall in energy prices should not leave an enduring imprint on aggregate inflation,” the notes state.

Stagnant wages also remain a concern on the downward pressure on inflation, according to the minutes. However, the January employment report showed one of the strongest gains in monthly earnings in recent memory.

The FOMC members are also keeping a close eye on developments in Europe, where Greece debt problems have once again threatened to upend stability in the 19-member euro zone. Also noted by Fed policy makers was the economic slowdown in China, political and military unrest in the Middle East and the Ukraine and how those situations threatened the U.S. economic recovery.

Fed officials maintained their long-held position that a decision on when to raise rates would remain dependent on economic data, and that the timing of a rate hike could quicken if data improves and slow down if the data sours.

FOMC members continued to debate how that timing might affect the ongoing recovery, which has moved forward in fits and starts since the global economy nearly collapsed in 2008.

"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," said the minutes state.

The Fed also maintained its position that it can be "patient" while deciding when to raise rates from the near-zero range where they’ve been held for over six years. The minutes show some FOMC members are concerned that dropping "patient" - whenever the time comes - risks shifting market expectations of a rate hike to an "unduly narrow range of dates."

The staff was also briefed on tools the Fed might use – tools that will be tested prior to a rate liftoff – once the Fed settles on a date for a rate hike. Specifically, tests have been conducted to determine how higher interest rates would impact overnight reverse repurchase agreements and other short-term loans handled by the Fed.