The Federal Open Market Committee's decision at its Sept. 16-17 meeting to keep federal interest rates at zero to 0.25% came as a result of concerns about global economic growth and overall financial market turbulence, said meeting minutes released Thursday.
However, members of the committee said despite the fact that “recent global and financial market developments might restrain economic activity somewhat as a result of the higher level of the dollar and possible effects of slower economic growth in China and in a number of emerging market and commodity-producing economies,” U.S. economic activity would still likely continue to expand at a moderate pace, the minutes said.
In terms of raising rates, despite “solid gains in payroll employment and the unemployment rate falling,” indicating one of the conditions for raising rates would soon be met, some members felt their confidence that inflation would gradually return to the “committee's 2% objective over the medium term had not increased” due to the slowdown in Chinese economic growth, further appreciation of the dollar, as well as oil and other commodity prices declining.
“I think the most important takeaway is that the minutes were more consistent with the meeting and the press conference on Sept. 17 than the subsequent comments, particularly from (Chairwoman Janet) Yellen and (William C.) Dudley that seemed to be a little more balanced, a little more leaning toward the December hike,” said Gene Tannuzzo, senior portfolio manager at Columbia Threadneedle Investments, in a telephone interview.
Ms. Yellen in a Sept. 24 speech said she expected the Federal Open Market Committee will raise interest rates before the end the year.
Many members expected those inflation conditions would be met later this year as long as economic activity “continued to expand at a moderate rate and labor market conditions improved further,” the minutes said. Overall, in the minutes, it was noted that “all but one member” concluded that “economic conditions did not warrant an increase in the target range for the federal funds rate at this meeting.”
That one member, Federal Reserve Bank of Richmond President and CEO Jeffrey Lacker, preferred to raise the target rate because “the current low level of real interest rates was not appropriate in the context of current economic conditions.”
“I think this is a Fed that's really dealing with a lot of conflicting factors, and one of the key ones is their model of reality vs. reality,” said Robert Tipp, managing director and chief investment strategist at Prudential Fixed Income, in a telephone interview, “and their model of reality tells them with the unemployment rate coming down to this level they should be worried about the inflation and the economy overheating.”
“Now they go through all the data and they go through the fact that they're at zero on the Fed funds rate and there's no room for fiscal stimulus, that there's downside risks from the economy, primarily from what they see going on in the international markets,” he added.
Mr. Tipp said spreads are rising, borrowing costs are increasing for companies and “confidence in the recovery could be flagging … and no signs that inflation is accelerating, that it's generally below their target by most measures.”
“Therefore they conclude there's more risk to raising rates than to waiting, and that's the bottom line.”
Mr. Tipp also said this was the first meeting that was supposed to result in raising rates that didn't, and he compared that to the Fed in 2013 holding off on tapering in a meeting when they had anticipated beginning tapering.
“Ideally what's going to happen over the next six months, they're hiking at a shallower pace than what they've indicated and that's going to have to be a shallow enough slope that won't derail the economy,” Mr. Tipp said. “That seems like a tall order.”