Federal Reserve policy-makers discussed various risks to the U.S. economy at their December meeting, but concluded that the big drop in oil prices was likely to help growth.
Minutes of the Fed’s Dec. 16-17 meeting, released today, show that Fed officials believed weakness in the global economy posed some of the biggest downside risks, particularly if it caused turmoil in global financial markets. But the Fed officials believed that overall, the sharp declines in oil prices would benefit the economy.
The minutes showed Fed officials were concerned about over-reaction in markets to changes in their guidance about future rate hikes and decided to declare their view that the central bank intended to be “patient” in moving toward a rate hike.
The minutes were released with the customary three-week delay. At the meeting, the Fed added that its new language was consistent with its previous guidance that it would keep rates low for a “considerable time.”
“In a meeting in which the Fed went half way to dropping its pledge to wait a considerable time, “most” of the attendees wanted to replace that term with the word “patient”, but then left one reference to “considerable” to avoid spooking the market,” said CIBC World Markets economists Avery Shenfeld in a research note. “Still they used the word patient to give them flexibility to begin raising rates after the “next couple of meetings”, which leaves them open to the April hike we have in our forecast.”
Shenfeld’s timeframe is ahead of many other economists, who believe the Fed won’t start raising rates until June and might even wait longer if inflation remains persistently below its 2% target.
“Note that the condition for the start of Fed tightening was expressed in terms of CORE inflation, opening the door to hiking rates even with a zero or possibly negative headline CPI that reflects oil prices,” added Shenfeld.
The central bank has kept its benchmark rate near zero for six years since reducing it to a record low in December 2008 when the country was in the grips of the Great Recession and the Fed was struggling to keep the banking system from collapsing during the financial crisis.
The Fed’s policy statement last month was approved on a 7-3 vote. The three dissents underscored the deep divisions inside the Fed as it transitions from an extended period of ultra-low rates to a period in which it will start to raise rates.
The dissents included regional bank presidents Richard Fisher of the Dallas Fed, Charles Plosser of the Philadelphia Fed and Narayana Kocherlakota of the Minneapolis Fed.
Fed Chair Janet Yellen said at a news conference following the December meeting that she believed it was unlikely that the Fed would begin raising rates “for at least the next couple of meetings,” a comment that was seen as ruling out rate hikes at the January and March sessions.
In October, the Fed ended its third round of bond buying, which had been intended to keep down long-term borrowing rates. Those bond purchases have boosted the Fed’s investment holdings to close to $4.5 trillion–more than four times the level when the financial crisis hit in the fall of 2008.