WASHINGTON – Fed officials disagreed widely when they met last month on when they would be ready to lift interest rates from record lows.
Minutes of the March 17-18 meeting released Wednesday reveal that several policymakers predicted a rate hike in June, while others concerned about low inflation didn’t think a rate hike would be warranted until later this year. Still others said the economy wouldn’t be strong enough for an increase until 2016.
The Fed’s benchmark interest rate has been near zero since December 2008.
In the statement the Fed issued after the meeting, it signalled it was moving closer to a rate increase by dropping language it had been using since December that it would be “patient” before starting to raise its benchmark rate.
The minutes stated that “almost all” the policymakers agreed on the wording change.
With the economy improving, “they preferred language that would provide the committee with the flexibility to subsequently adjust the target range for the federal funds rate on a meeting-by-meeting basis,” the minutes said.
But the minutes, which were released after the customary wait of three weeks, showed the group was split over the exact timing of the first rate hike. The Fed said in its policy statement that it wanted to see more improvement in the job market and needed to be “reasonably confident” that inflation would move toward its 2 per cent goal.
“Several participants” assessed that an strengthening economy would likely warrant the start of rate hikes in June, the minutes said. Other officials expressed concerns that falling energy prices and a stronger dollar would keep pushing inflation below 2 per cent. They said the central bank should hold off until later in the year.
“A couple” of Fed officials said they did not believe economic conditions would justify the start of rate increases until 2016.
What they did agree on was that figuring out where inflation is headed would be difficult.
“It was noted that there were no simple criteria for such a judgment,” the minutes said, adding that policymakers didn’t necessarily need to see increases in core inflation or wages before moving ahead with a rate hike.
Federal Reserve Chair Janet Yellen told reporters at a news conference following the meeting that just because the Fed had dropped the word patient did not mean the central bank would become “impatient” in deciding when to start raising rates. She also stressed that the Fed’s first rate move would be dependent on how the economy, including the job market and inflation, perform in coming months.
In a speech two weeks ago in San Francisco, Yellen reiterated that when rate hikes do begin, they are likely to be very gradual.
Many private economists now predict the Fed’s first rate hike will not occur until September, and they expect just two small quarter-point increases this year.
Analysts point to a slew of disappointing economic data recently, including Friday’s jobs report, which showed that employers added just 126,000 jobs in March. The data indicate that growth in the world’s biggest economy decelerated in the first quarter.
“If we are right and employment growth rebounds in April and May, then a June rate hike might not be out of the question,” said Paul Ashworth, chief U.S. economist at Capital Economics.
Once liftoff begins, the pace of rate hikes will likely be determined by how financial markets react, he added.
“If Treasury yields soar in response to the first rate hike, then the Fed might pause for quite a while” before raising rates for a second time, Ashcroft said.
But if markets shrug it off, the Fed may feel more confident in accelerating its rate increases, he said.