Fed minutes show rift on how to signal interest rate shift

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The minutes of the last Federal Reserve meeting show their is not unanimity on how to best signal to markets when rates might go up. (Cliff Owen/Associated Press)

Federal Reserve officials had differing views in June on the best way to signal to financial markets when they might raise a key short-term interest rate. They were in broad agreement, however, that their monthly bond buying program will end in October.

Minutes of the Fed’s June 17-18 meeting released Wednesday showed officials split between those who wanted to communicate that the Fed remains concerned that inflation is rising too slowly and those who were worried that the economy might rebound faster than currently expected.

In the end, the Fed statement stuck to the current guidance that rates will likely remain low for a “considerable time” after the bond purchases end.

On the bond purchases, Fed officials supported the view that the last reduction would likely total $15 billion in October.

January-March GDP drop discounted

The minutes also showed that Fed officials discounted the big drop in economic growth in the first three months as a slump that reflected temporary factors. They continued to express optimism that the economy will rebound to healthy growth rates for the rest of this year.

However, the minutes revealed that several Fed officials saw developments in Iraq and Ukraine “as posing possible downside risks to global economic activity or potential upside risks to world oil prices.”

At its last meeting, the Fed kept policy essentially unchanged, holdings its key short-term interest rate at a record low near zero, where it has been since December 2008. It also made a fifth $10 billion reduction in its monthly bond purchases, bringing them down to $35 billion a month. Before the reductions began in December, the purchases, aimed at keeping long-term interest rates low, stood at $85 billion per month.

The minutes showed that Fed officials discussed a question they have been getting about whether the last reduction in purchases might total $15 billion or $5 billion. According to the minutes, the participants said it would be appropriate to reduce the bond purchases by $15 billion in the last move, which would occur at the October meeting, rather than hold off and make a final $5 billion reduction in December.

But Fed officials stressed that action did not signal an earlier move to start boosting its short-term rates.

Rate hike expected in summer 2015

Most private economists believe the Fed’s first rate hike will not occur until next summer although some analysts believe that move will occur a few months sooner if the labour market continues to show healthy gains in employment.

The government reported last week that the unemployment rate fell to 6.1 percent in June, the lowest level since September 2008, the month the financial crisis hit with force, while 288,000 jobs were created, the fifth straight monthly gain above 200,000.

The minutes showed there was an extensive discussion about how the Fed should start reducing its massive holdings of Treasury bonds and mortgage-backed securities, which will total close to $4.5 trillion when the new purchases end later this year. No decisions were made at the June meeting but the minutes said Fed officials believe a new plan, which would replace the exit strategy developed in June 2011, should be formulated before the end of this year to provide advance notice to markets.

The Fed’s actions to sell off its holdings could have a significant impact on interest rates.

The minutes were released Wednesday with the customary three week delay since the last meeting.

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