The minutes of the U.S. Federal Reserve’s January 27 to 28 policy meeting revealed last week that policymakers were still unable to determine when economic statistics would justify the central bank’s inevitable rate hike, or how to deliver news of a possible rate hike timing with the right choice of words.
According to the minutes of the late January policy meeting, Fed officials may not be ready to go for an earlier-than-expected rate hike, as some of the central bank’s movers and shakers remain concerned about abnormally low inflation rates, global economic troubles, and a continuing softness in the U.S. employment market, despite recent improvements. The minutes show that a lot of officials “observed that a premature increase in rates might damp the apparent solid recovery in real activity and labor market conditions.” The Fed has kept its benchmark federal funds rate at a near-zero level since December 2008, having reduced rates to near-zero pursuant to stimulating the U.S. economy during the Great Recession.
Following the release of the Fed’s minutes, which is customarily done three weeks after a policy meeting, analysts sought to read into the language used by Fed officials and figure out its plans going forward, particularly in terms of a rate hike. BMO Capital Markets senior economist Sal Guateri posited that a “fair number of policymakers” still want to be confident that economic growth will remain strong, while inflation would return to the Fed’s 2 percent target before it even considers increasing its overnight rate. According to Guateri, the language used in the minutes suggests that the initial rate hike may not take place before September 2015.
Speaking of language, that was a major talking point on the Fed’s minutes of the meeting, as policymakers debated on whether to remove the word “patient” when referring to how long the central bank will wait before increasing rates. Officials worried as to whether removing the word would roil investors and cause panic in worldwide financial markets.
The Fed also was not able to figure out what type of economic thresholds need to be met before it increases interest rates and ceases its ultra-easy monetary policy. Officials, however, were in agreement that “it would be difficult to specify in advance” a comprehensive list of economic statistics and certain thresholds that need to be met to justify a rate hike.
Last month’s jobs report showed unemployment at 5.7 percent, which is relatively close to the Fed’s targets of 5.2 percent to 5.5 percent unemployment before raising rates. That was actually a tad higher than the previous month’s figure of 5.6 percent. However, the January employment report was particularly notable because the U.S. economy was shown to have added 257,000 jobs last month, capping off the strongest three-month cluster in the jobs market in 17 years.
Further, the increase in unemployment was driven by individuals who had previously soured on the job market, but are now hoping to return to work with broader economic conditions gradually improving.
Investors reacted positively upon the release of the minutes, as stock market losses had cooled down, while bond prices went up, reducing the yield on 10-year Treasury notes from 2.14 percent to 2.07 percent at the close of Tuesday’s trading.