Fed Minutes show some concern on economic outlook

WASHINGTON — Janet L. Yellen, the Federal Reserve chairwoman, marshaled a clear consensus of Fed officials for the momentous decision to raise the Fed’s benchmark interest rate last month, but some of those officials have unresolved concerns that could slow the march toward higher rates.

An official account of the December meeting, published Wednesday, emphasised the expectation of Fed officials that “economic conditions would evolve in a manner that would warrant only gradual increases in the federal funds rate” over the next year. And that is the plan if everything goes well. The minutes indicate that some officials are worried the Fed is once again overestimating the health of the economy.

The Fed is expected to raise interest rates by about 1 percentage point over the next year, an expectation based on the predictions of Fed officials in their December economic forecasts. And the minutes described most officials as confident that the economy would continue to grow with less help from the central bank, even if they’re not ready yet to pull away the crutches completely.

Asked Wednesday about the expectation that the Fed will raise rates four times in 2016, by a quarter-point each time, Stanley Fischer, the Fed’s vice-chairman, said Wednesday on CNBC that, “My view is that those numbers are in the ballpark.” Some other officials have made similar remarks.

Fed officials generally expect the strength of the domestic economy, fuelled by increased consumer spending, to outweigh the weakness of the global economy, which has limited foreign demand for US products. Moreover, they expect that growth will be strong enough to drive continued improvement in labour market conditions — fewer people without jobs, fewer people with part-time jobs, fewer people in jobs they don’t like and, perhaps most important, more people able to secure pay raises.

And as employment increases and wages rise, the Fed expects inflation to rise more quickly.

Inflation is often viewed as a negative force but the Fed has concluded that the economy does best when prices rise about 2 per cent a year. In recent years, prices have climbed much more slowly.

“Nearly all participants were now reasonably confident that inflation would move back to 2 per cent over the medium term,” the minutes said. However, the account was littered with notes of caution. The Fed has repeatedly forecast that inflation would rise, and it has repeatedly been wrong. Some officials are increasingly concerned that something has changed about the way the economy works.

The long-standing pattern is that inflation rises as unemployment declines. A core group of officials, including Yellen, is sufficiently confident in this view to start raising rates in anticipation. The question is how long the Fed is willing to continue to raise rates without tangible evidence.

Lael Brainard, a Fed governor, has argued that her colleagues are underestimating the potential deflationary impact of global economic weakness. The minutes, describing this view, said a couple of officials “worried that a further strengthening of the labour market might not prove sufficient to offset the downward pressures from global disinflationary forces.”

The Fed also has taken comfort in the stability of inflation expectations, which show that Americans have not changed their views about the likely level of future inflation. But that blanket has been fraying for some time. Measures of expectations derived from asset prices already are far weaker than survey measures, and in recent months, some of the survey measures also have shown signs of declining.

The minutes said several officials expressed “unease” about that decline, while others saw benign explanations, suggesting that lower oil prices, for example, were exerting an undue influence.