Some Fed officials saw the move to tighten as a close call, and there was increased concern about the downside risks to the central bank’s 2 per cent target, according to minutes of the meeting released Wednesday.
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Even further strength in the labour market, where the 5 per cent jobless rate is nearly at Fed officials’ definition of full employment, “might not prove sufficient to offset the downward pressures from global dis-inflationary forces”, a couple of officials said.
Evans isn’t along among Fed policy makers in his concern that inflation may be held down for the foreseeable future, primarily due to cheap oil that has kept energy prices low and an appreciating dollar that has weakened the price of U.S.made goods.
Despite the reservations expressed at the meeting, Federal Reserve Vice Chairman Stanley Fischer, speaking on CNBC Wednesday, said the market is underestimating how many interest rate increases the central bank will undertake this year.
Fed policymakers agreed to publicly say that they expected to raise rates only gradually and be prepared to alter that approach if economic conditions warranted.
“Some survey-based measures of longer-run inflation expectations edged down, while market-based measures of inflation compensation were still low”.
The minutes did not mention a specific number of rate hikes.
For example you could get a rate around 4 percent in 2015 but you’re looking around 4 and a half to 4.625 percent for a 30 year fixed mortgage in 2016.
Wage growth remains tepid compared to before the 2007-09 recession, but an upward trend is now more clearly coming into view, supporting the outlook within the Fed that four quarter-point rate hikes could be needed this year. China’s central bank’s recent decision to manage the yuan against a basket of currencies, instead of pegging it exclusively to the dollar, would give it greater flexibility. Then inflation would rise above the target and the Fed would have to intervene more than expected.
However, analysts say indications from financial markets are that investors are more bearish, expecting only two hikes of a quarter-point each. This of course is a very unlikely scenario as oil prices do not seem to have hit bottom and the disagreements between Iran and Saudi Arabia have added to the oversupply issues pushing the price to near $30.
The move to hike in December while promising a gradual path of future increases was a compromise between policymakers who had been ready to raise rates for months and those who feel the economy is still at risk from weak inflation and slow global growth.
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“The Fed has to look through the markets and assess how this changes the outlook for China, and with what impact on the US”, said Mickey Levy, chief economist for the USA and Asia at German bank Berenberg, in NY. “If the Core PCE is 1.4, fed funds is 25 (basis points), we’re at negative 115 basis points in terms of a real fed funds rate right now”. Gone were the confidence and swagger from Fed Chair and members leading up to the rate hike announcement.
