New minutes show Federal Reserve sticking to a gradual approach on rates

Federal Reserve Board Chair Janet Yellen is guiding the central bank toward gradually raising the federal funds rate. (Chip Somodevilla/Getty Images)

Members of the Federal Reserve’s Open Market Committee were divided at the mid-March meeting over whether to raise interest rates in June or to wait a bit longer, but they remained united in their expectation that they would raise rates gradually.

According to minutes of the meeting released Wednesday, several members expected that economic data would justify an increase in interest rates in June, but others expected that low oil prices and the strong dollar would keep a lid on inflation and allow the central bank to wait longer before acting.

Two members said there would be no need for a “liftoff” in interest rates until 2016.

The Federal Reserve has not raised rates for six years, seeking to revive the economy without rekindling inflation. The date of a rate increase has been the subject of widespread speculation among investors.

Fed officials have tried to play down the significance of the first move by dubbing it a step toward “normalization.”

Regardless of the date of liftoff, most Fed members expect to raise the federal funds rate “fairly gradually” as unemployment ebbs and inflation resumes a modest pace, the committee’s minutes said.

Most of the members also expect the federal funds rate “to stay appreciably below its longer-run level” even after inflation and unemployment approach target levels, the minutes said.

Between the meeting in December 2014 and the gathering in March, most Fed members lowered their expectations for the speed with which they would raise the federal funds rate, and they slightly lowered the unemployment rate they considered normal.

In a speech Wednesday in New York, Jerome H. Powell, a member of the Fed’s board of governors, said that the unemployment rate “probably understates the amount of slack still remaining in the labor market.” He said that the low percentage of the population participating in the labor force suggested that potential workers “may be waiting on the sidelines for further improvements in job opportunities and wages.”

Powell said he favored a rate increase this year, but he also endorsed a measured approach. “My view is that if the economy continues on its expected path, it will be appropriate for a time to increase rates fairly gradually,” he said.

Powell said the central bank must weigh the risk that an increase could “truncate” the economy’s recovery from the financial crisis. But he said that for now he was more concerned about a second risk: that keeping rates too low could “eventually undermine financial stability.” He said, however, that he saw no signs of that yet.