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Some FOMC Members Saw December Rate Rise as ‘Close Call’

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The Federal Reserve’s decision to raise interest rates last month was a “close call” for some policymakers who worried about too-low inflation and received assurances that their colleagues would closely monitor its progress.

“Some members emphasized the importance of confirming that inflation would rise as projected and of maintaining the credibility of the committee’s inflation objective,” said minutes of the Federal Open Market Committee’s Dec. 15-16 meeting, released Wednesday in Washington.

The minutes also indicated that some members believed “the risks attending their inflation forecasts remained considerable” even as “the committee was now reasonably confident in its expectation that inflation would rise, over the medium term, to its 2 percent objective.”

The 10 voting members of the committee decided unanimously three weeks ago to raise the benchmark federal funds rate by a quarter percentage point to a range of 0.25% to 0.5%. The move marked the end of an era of near-zero rates dating back to December 2008.

Broad Agreement

The minutes showed “almost all” FOMC participants were “now satisfied the committee’s criteria for beginning the policy normalization process” had been met.

Stocks maintained declines after the minutes showed there was unanimity among policy makers to increase interest rates. The Standard & Poor’s 500 Index dropped 1.3% to 1,991.15 at 2:39 p.m. in New York.

While unemployment has declined significantly in recent years, inflation has languished below the Fed’s 2% target for more than three years, driven down by the plunge in oil’s price and a strengthening dollar. Even after stripping out volatile food and energy components, prices rose just 1.3% in the 12 months through November, according to the Fed’s preferred measure for core inflation.

Fed officials noted several times that monetary policy would ultimately depend on how the economy fared over time. “Members stressed the potential need to accelerate or slow the pace of normalization as the economic outlook evolved,” the minutes said.

The discussion also addressed inflation expectations, which had declined slightly in recent months.

“Many concluded that longer-run inflation expectations remained reasonably stable,” the minutes said. “However, some expressed concerns that inflation expectations may have already moved lower.”

Fed Chair Janet Yellen said in her Dec. 16 press conference she expected the Fed to proceed “gradually” as it considered additional rate increases. She added that future policy would depend on “how the economy evolves relative to our objectives of maximum employment and 2% inflation.” The minutes listed a number of justifications for the Fed to proceed gradually. Moving slowly would keep policy sufficiently accommodative to continue supporting the labor market and put upward pressure on inflation. It would also allow members to “assess how the economy was responding to increases in interest rates.”

Prices in federal funds futures contracts suggest investors see zero chance of a rate increase when the FOMC next convenes on Jan. 26-27. Odds of a rate hike in March rise to 46%, based on the assumption that the effective fed funds rate will reach 0.625% after another increase.

Tightening Path

Earlier Wednesday, Fed Vice Chairman Stanley Fischer said policy makers’ median forecast predicting four interest-rate increases in 2016 were “in the ballpark,” though China’s slowing economy and other sources of uncertainty make it difficult to predict the path of policy.

Financial markets expect only two quarter-point increases this year, according to pricing in federal funds futures, a view Fischer called “too low.”

“We make our own analysis and our analysis says that the market is under-estimating where we’re going to be,” he said in an interview on CNBC.

The U.S. economy has made significant progress in recovering from the worst recession since the Great Depression. Unemployment has halved to 5% from its peak in October 2009, while year-on-year growth over the past four quarters has averaged 2.6%.

The FOMC is currently comprised of five Washington-based governors and 12 regional Fed bank presidents. The governors and the president of the New York Fed hold permanent votes on policy decisions. The remaining 11 presidents share four votes that rotate on an annual basis.


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