Only a small minority of Federal Reserve officials were willing to look past the stock market weakness that emerged after the USA central bank raised interest rates for the first time in nearly a decade, arguing that it could be the result of bringing equity valuations more in line with historical norms.
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The ongoing strength of the labor market was cited as a key component of several officials’ belief that inflation would eventually reach the Fed’s target.
Projections provided by Fed rate-setters in December for four interest rate hikes in 2016 were not a promise, but rather a forecast based on underlying macroeconomic estimates, the central banker said.
“Most policymakers thought that the extent to which tighter conditions would persist and what that might imply for the outlook were unclear, and they therefore judged that it was premature to alter appreciably their assessment of the medium-term economic outlook”, the minutes state.
The balance of risks matters because it is an indication of whether they are inclined to raise rates again, hold steady or cut rates.
“A number of participants were concerned about the potential drag on the USA economy from the broader effects of a greater-than-expected slowdown in China and other (emerging market economies)”, according to the minutes.
On Tuesday, one of the top Federal Reserve policymaker dampened the hopes when by saying, the Federal Reserve should be “unhurried” while considering the timing for the next interest rate hikes keeping in mind the volatile financial markets and the troubles overseas. Inflation has already been running below the Fed’s 2% target for more than 3½ years.
Testifying before Congress last week, Fed chairwoman Janet Yellen warned that growth in the USA economy could be hurt by global conditions.
In her congressional testimony, Yellen was asked if the developments could derail the Fed’s plans to boost rates gradually this year. “The question is whether the Fed dots remain relevant at all”, said Thomas Costerg, senior USA economist at Standard Chartered.
Expectations the Fed might press on with those rises has contributed to the anxiety plaguing investors since the beginning of the year. By waiting until the fall, the economy will be growing at a faster pace, inflation will be rising, and the Fed can then “normalize policy…with fewer rate hikes than the Fed used to apply”.
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Recent comments from other Fed officials also have sounded a note of caution.
