WASHINGTON – Federal Reserve officials, worried about weak growth overseas, agreed last month that they would begin raising interest rates only when measures of the economy’s health and inflation signalled the time was right.
Minutes of the Fed’s discussions at the Sept. 16-17 meeting released Wednesday showed that officials expressed rising worries about lacklustre growth in Europe, as well as slowing growth in Japan and China.
Stocks surged after the release of the minutes. Investors appeared to take the revealed discussion as a sign that the Fed was in no hurry to raise interest rates. The Dow Jones industrial average was up more than 270 points in afternoon trading.
“The markets like the news that there is no urgency on the part of Fed officials to stop doing what they are doing,” said Chris Rupkey, chief financial economist at MUFG Union Bank in New York.
Fed officials also discussed the potential adverse impacts of a stronger dollar, which has gained strength recently against the euro, yen and British pound. A stronger dollar makes U.S. goods more expensive overseas and foreign goods cheaper in the United States, a development that can dampen inflation.
“Some participants expressed concern that the persistent shortfall of economic growth and inflation in the euro area could lead to a further appreciation of the U.S. dollar and have adverse effects on the U.S. external sector,” the minutes said.
At the September meeting, the Fed voted 8-2 to keep its key short-term interest rate at a record low near zero and retained language that it expected the rate to remain at that level for a “considerable time” after it ends monthly bond purchases. The minutes showed that some officials didn’t think that was clear enough.
The current language “could be misunderstood as a commitment rather than as data dependent,” the minutes said.
But the minutes also showed that officials worried that any tweaks to the wording of the policy guidance could be misinterpreted as a fundamental shift in the Fed’s stance on interest rates, which could trigger an unintended rise in market rates.
Many participants indicated that they wanted to clarify that monetary policy changes would be closely linked to the country’s economic performance.
The Fed has emphasized that the timing of an interest rate hike will depend on officials’ views on how close the economy is to achieving the Fed’s goals for maximum employment and inflation running at an annual rate of 2 per cent.
For the past two years, inflation has been running well below 2 per cent, giving the Fed room to keep rates at a record low in an effort to bolster the economy and generate more jobs. The government reported last week that the unemployment rate in September fell to a six-year low of 5.9 per cent, closer to the Fed’s goal of an unemployment rate in a range of 5.2 per cent to 5.5 per cent.
The minutes were released with the customary three-week delay following the Fed’s last meeting.
The consensus view among private economists is that the first rate hike will not occur until around June of next year. The Fed’s short-term rate has been at a record low near zero since December 2008.
The Fed’s bond purchases, designed to keep long-term interest rates low, have been trimmed in seven consecutive $10 billion reductions at each meeting starting last December. The purchases are currently at $15 billion and a final reduction to zero is expected at the next meeting on Oct. 28-29.
The two Fed officials who voted against the September action were Charles Plosser, president of the Fed’s regional bank in Philadelphia, and Richard Fisher, president of the Dallas Fed.
Both objected to the decision to signal “considerable time” before the first rate increase. Plosser and Fisher are leading hawks, Fed officials who are concerned that low interest rates could generate unwanted inflation pressures in the future. They are also worried that the Fed’s policies could be inflating asset bubbles that could burst and destabilize financial markets.