Federal Reserve policymakers expressed concern about lagging inflation as well as threats to the US economy posed by a stronger dollar and developments in China, but deemed conditions for a rate rise to be "approaching", according to minutes released yesterday.
The minutes of the July 28-29th meeting of the Federal Open Market Committee (FOMC) include no mention of any plans to raise rates at their next meeting to be held on September 16th and 17th. They point to a vigorous debate within the Fed over a number of key data points including inflation and the timing of a hike.
But the minutes also offer a view of a Fed that is clearly approaching decision time on raising rates for the first time in almost a decade with much of the bank’s internal discussions focused on how best to communicate the eventual move to markets.
“Most [FOMC members] judged that the conditions for policy firming had not yet been achieved, but they noted that conditions were approaching that point,” Fed staff wrote.
When that moment came, however, the Fed’s policymakers appeared keen to emphasise it would likely be followed only by modest future increases in the federal funds target rate.
Financial conditions
Members of the FOMC were keen to make sure that “the committee’s communications around the time of the first rate increase should emphasise that the expected path for policy, not the initial increase, would be the most important determinant of financial conditions and should acknowledge that policy would continue to be accommodative,” Fed staff wrote.
With employment figures strong, the state of the US labour market prompted little discussion, although some members of the FOMC said they were still concerned about the fact wages were rising only slowly and other evidence of continuing slack in the labour force.
Alongside that discussion was a more pointed debate within the Fed over inflation and whether it is on a path toward the central bank’s 2 per cent target. New consumer price data released on Wednesday showed prices ticked up by 0.1 per cent across the US economy in July from a month earlier, putting them just 0.2 per cent higher than a year before. Excluding energy, consumer prices were up just 1.8 per cent from July 2014.
At their July meeting FOMC members “generally anticipated that inflation would rise gradually toward 2 per cent as the labour market improved further and the transitory effects of earlier declines in energy and import prices dissipated,” the minutes said.
But “some participants” also took a more pessimistic view, pointing to the risk of further declines in oil and commodity prices and the risk of a further strengthening in the dollar.
Depreciate
The July meeting occurred before China’s move last week to depreciate its currency, the renminbi, in what many have interpreted as an expression of concern by the leadership in Beijing over the slowing Chinese economy. But the Fed policymakers already had the potential risks posed by China in mind when they met in July.
Even as they saw diminishing risks of an escalating crisis in Greece some FOMC members expressed concerns about events in China.
“While the recent Chinese stock market decline seemed to have had limited implications to date for the growth outlook in China, several participants noted that a material slowdown in Chinese economic activity could pose risks to the US economic outlook,” the minutes said.
There were also concerns that a Fed move to raise rates could lead to a divergence internationally in interest rates that “might lead to further appreciation of the dollar, extending the downward pressure on commodity prices and the weakness in net exports,” Fed staff wrote.
(Copyright The Financial Times Limited 2015)
