Members of the Federal Reserve’s policy-setting board debated last month whether to eliminate the phrase “for a considerable time” from its guidance on the timing of raising the federal funds rate, and how a change in language might impact financial market reaction.
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Ultimately, members of the Federal Open Market Committee (FOMC) decided to keep the phrase in place for the time being regarding its assessment of how long rates will remain at their current low levels once the Fed phased out its monthly bond-purchasing program.
Overall, a picture emerged from the minutes released Wednesday of a Fed divided over the timing and trajectory of interest rates as incoming economic data continues to point up the fragility of the long-running economic recovery as the Fed seeks to achieve its dual mandate of full employment and price stability.
A majority of Fed members still hold to the prediction that inflation, despite a recent downturn, will move higher toward the central bank’s 2% target rate and reach that goal in 2015.
Meanwhile, another solid jobs report in October which showed the unemployment rate had fallen to a six-year-low of 5.8% maintained the Fed’s position that labor markets are strengthening and moving toward its goal of an unemployment rate range of 5.2%-5.6%, or full employment.
Further, minutes from the meeting show all but one member supported ending the central bank’s quantitative easing program, and that members anticipate “turbulent” market conditions when a decision is made to move rates higher.
For months, the Fed has included the phrase “for a considerable time” in its statement to reassure markets once QE is phased out, rates won’t move higher until the Fed is confident the economy can stand on its own without Fed-prompted stimulus.
Some inflation hawks on the FOMC have called for removing the phrase to prepare markets for the inevitability of higher rates and more expensive borrowing costs. But inflation doves on the FOMC led by Fed Chair Janet Yellen won out in October, voting to keep the phrase in.
The dovish response came in the wake of a turbulent period in mid-October when stocks fell based on fears of slowing global growth and fears of a spread of the deadly Ebola virus. Those concerns proved temporary, however, and markets regained their losses by the end of the month.
Nevertheless, the volatility that occurred despite additional evidence that the economy is slowly gaining strength prompted the FOMC to maintain its cautious language.
The FOMC also reiterated its position that the timing of raising rates will depend on incoming data and won’t be tied to any calendar date, a point emphasized repeatedly by Fed members in public statements and speeches.
“In their discussion of communications regarding the path of the federal funds rate over the medium term, meeting participants agreed that the timing of the first increase in the federal funds rate and the appropriate path of the policy rate thereafter would depend on incoming economic data and their implications for the outlook,” the minutes read.
The members continued to debate whether to add language that would clarify when and how the Fed plans to begin its “nomalization process,” namely raising interest rates.