Minutes from the Federal Reserve’s September policy meeting show central bankers remain determined to take a cautious approach toward raising interest rates and normalizing monetary policy as the economy continues its slow, gradual recovery.
Continue Reading Below
Economic activity, according to the minutes, continues to expand “at a moderate pace,” but not fast enough to hasten a decision to raise rates.
“During its recent meetings, the Federal Open Market Committee (FOMC) discussed ways to normalize the stance of monetary policy and the Federal Reserve’s securities holdings. The discussions were part of prudent planning and do not imply that normalization will necessarily begin soon,” the minutes read.
Investors cheered the Fed’s reticence toward moving away from its accommodative policies, pushing stock markets higher. The Dow Jones Industrial average surged after the 2 p.m. ET release of the Fed minutes, jumping well over 100 point, up 218 points in mid-afternoon trading.
The consensus among members of the policy-setting Federal Open Markets Committee -- as it has been for months -- is that rates will start to gradually move higher in mid-2015, according to the minutes.
Meanwhile, the internal debate continued as some members of the FOMC suggested rates should move higher sooner rather than later and that the Fed’s current language regarding a rate hike may be misleading.
"The concern was raised that the reference to 'considerable time' in the current forward guidance could be misunderstood as a commitment rather than as data dependent," according to the minutes of the Fed's Sept. 16-17 meeting.
In its Sept. 17 statement, the Fed's policy-setting committee repeated its commitment to keeping rates at their current near-zero range for a “considerable time” after a bond-purchasing stimulus program known as quantitative easing ends.
Inflation hawks -- members of the FOMC who believe low rates will eventually bring runaway inflation -- want the phrase “considerable time” removed from the statement. The hawks are widely expected to win that argument at the Fed’s October meeting, although the timetable for a rate liftoff isn’t likely to change.
The minutes also indicated that FOMC members have grown increasingly concerned that a strengthening U.S. dollar could also keep inflation below the Fed’s 2% target rate. According to the minutes, a “couple” of participants expressed concerns that “domestic inflation might be held down by persistent disinflation among U.S. trading partners and further appreciation of the dollar."
Still, much of the language from September meeting suggests optimism that the recovery is slowly gaining traction.
“Overall, FOMC participants expected that, under appropriate monetary policy, economic growth would be faster in the second half of 2014 and in 2015 than their estimates of the U.S. economy’s longer-run normal growth rate,” the notes state.
The unemployment rate is forecast to continue to decline “gradually” over the next two years, and to be “at or below” Fed economists’ participants’ prior forecasts by the end of 2017.
Nearly all of the FOMC participants projected that inflation, as measured by recent increases in personal consumption expenditures, would rise gradually over the next few years, reaching a level at or near the FOMC’s 2% goal in 2016 or 2017.
In other words, despite unavoidable hiccups, the economy is gradually approaching the Fed’s dual mandate of full employment and price stability as recently defined by Fed Chair Janet Yellen as an unemployment rate in a range of 5.2%-5.6% and inflation at a range of 1.7% to 2%.