Divided Fed wanted to keep rate ‘options open’

WASHINGTON, USA – US Federal Reserve policy makers last month believed risks to the US economy had lessened but wanted to keep their interest rate policy “options open,” according to minutes released Wednesday, August 17.

Policy makers also believed the global financial system had properly withstood any shock created by Britain’s June vote to exit the European Union, the minutes said.

Taken during the July 26-27 meeting, the minutes detailed policy makers’ differing views of the US economic outlook as they decided to leave a key interest rate untouched at 0.25-0.5%.

But the minutes showed that inflation – which has stubbornly stuck well below the Federal Open Market Committee’s 2% target – was foremost in their minds.

The FOMC remained divided on the near-term danger of inflation, as it was in its June meeting, with some seeing little threat but others worried that there could be a sudden upward push on prices as the labor market continues to tighten.

The continuing fall in unemployment was not a plausible cause for worry, according to most members.

“Most also saw relatively low risk that a further gradual strengthening of the labor market would generate an unwanted increase in inflationary pressures,” the minutes said.

Yet other members viewed labor markets as being at or close to maximum employment and expected inflation to rise.

They felt “another increase in the federal funds rate was or would soon be warranted,” according to the minutes.

With the FOMC still divided, the minutes did not appear to suggest that an increase in rates was any more likely when members meet on September 20-21.

“Market expectations for a rate hike in September are still low, and this committee tends to be cautious,” said Sara Johnson and Ozlem Yaylaci, economists at IHS Markit.

In a client note, they said they expected a hike to come at the committee’s December meeting, when data on trends and labor market strength could be more persuasive.

The Federal Reserve ended 2015 by raising the key target federal funds rate for the first time in nearly a decade. But policy makers have repeatedly put off subsequent hikes planned for 2016 as domestic and global economic conditions created cause for worry.

The possible dangers from the June Brexit vote was not entirely to be forgotten, according to the minutes, with FOMC members saying it added “significant uncertainty to the medium- to longer-term outlook for foreign economies.”

Wall Street greeted the news with an effective shrug, with the Dow Jones Industrial Average up less than 0.1% at 18,567.46, the S&P 500 in similar territory at 2,180.98 and the Nasdaq down less than 0.1% at 5,225.73 at about 1930 GMT.

The dollar was also flat on currency markets, with the euro at $1.1282 and the pound at $1.3041. – Rappler.com