“Some members said that their decision to raise the target range was a close call, particularly given the uncertainty about inflation dynamics,” the minutes said.
The documents cast the first detailed insight into the central bank’s December decision to raise the cost of borrowing and close out a period of rock-bottom rates that had been designed to stimulate the economy. That move now puts the Fed in a delicate position in which it aims to gradually push rates back toward historically normal levels, even as the U.S. economy faces headwinds from a global slowdown, cheap commodity prices and slumping productivity at home.
The path of interest rates — which have lagged for several years below the Fed’s 2 percent target — will figure heavily in the calculus of what comes next, the minutes suggested. Inflation has been held down both by plunging energy prices and stagnant wages, and some economists expect that it will pick up as the labor market tightens and employers offer raises to compete. But the Fed’s minutes showed that, for some in the Fed’s 10-member committee, “the risks attending their inflation forecasts remained considerable.” Those risks could take the shape of oil price shocks or a sustained rise in the value of the dollar. The Fed has a mandate to guide the economy both toward maximum employment and stable prices.
The Fed expects that economic conditions will evolve “in a manner that would warrant only gradual increases in the federal funds rate,” the minutes said. Members had “significant concern about still-low readings on actual inflation and the uncertainty and risks present in the inflation outlook.”
Yellen has stressed that future rate hikes will come gradually, and the Fed’s members, on average, expect that interest rates will rise by about 1 percent this year, to 1.4 percent. But investors are skeptical that rates will rise that quickly.
“In determining the size and timing of further adjustments to monetary policy, some members emphasized the importance of confirming that inflation would rise as projected and of maintaining the credibility of the Committee’s inflation objective,” the minutes said.
Markets welcomed the Fed’s rate hike in December, which was telegraphed by Yellen and other officials and came on the heels of several months of strong jobs data. But equities have gotten off to a rocky start in 2016, with the S&P 500 diving below 2,000 on Wednesday and the Dow Jones Industrial average dipping below 17,000. Both indexes are down roughly 3 percent on the week.