Fed Officials, at Meeting, Found Economic Outlook Cloudy

WASHINGTON — Federal Reserve officials threw up their hands in January, deciding that they could not decide whether market turmoil would impede domestic economic growth.

The Fed in recent years has issued an assessment of its economic outlook after each meeting of its policy-making committee, but that assessment was missing from the statement after the most recent meeting in January. An official account, published on Wednesday after a standard three-week delay, makes clear that Fed officials simply did not know what to say.

“Most policy makers thought that the extent to which tighter conditions would persist and what that might imply for the outlook were unclear, and they therefore judged it was premature to alter appreciably their assessment of the medium-term economic outlook,” the meeting account said.

It was the first time since March 2003 that the Fed declined to characterize the risks to its outlook, according to Michael Feroli, chief United States economist at JPMorgan Chase.

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The Fed is unlikely to raise its benchmark interest rate while this confusion persists, suggesting that investors are right to discount chances of a rate increase at the Fed’s next meeting, in March. But according to the account, Fed officials remain optimistic that the market turmoil will not leave a lasting mark, indicating that rate increases could resume this year.

“Lack of agreement on the balance of risks puts the committee into a ‘wait-and-see’ posture,” said Kevin Logan, the chief United States economist at HSBC. “In our view, it is nearly certain that the committee will not be raising the federal funds rate at the March or April meetings. It is not likely that enough time will pass before those meetings take place for the uncertainty surrounding the international economic and financial market situation to clear up.”

Fed officials probably wish they hadn’t scheduled a meeting for late January, given the convulsions in financial markets caused in part by falling oil prices and broader concerns about the health of the global economy. Officials worried that investors were tightening financial conditions, raising interest rates for riskier borrowers while plowing money into safe havens like Treasuries.

Domestic economic data also has been inconsistent. The growth of gross domestic product slowed in the fourth quarter even as the economy continued to add jobs in large numbers. Incomes are rising but household and business spending has slackened somewhat.

And the persistent sluggishness of inflation provided one more source of uncertainty. The Fed maintains an official expectation that inflation will rise as job growth continues. Yet the continued decline of oil prices and the dollar’s strength are delaying any such rebound, and some Fed officials noted worrying signs that people’s expectations for future inflation also were eroding.

Some officials thought the costs and benefits of the forces roiling the global economy, taken together, would have a surprisingly small effect on the domestic economy. Lower stock prices are draining wealth from households, but falling oil prices put money right back into the same pockets. Moreover, those officials continue to expect faster growth later this year.

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“It might prove prudent to wait until the inflation data are stronger before we undertake a second rate hike,” Patrick T. Harker, president of the Federal Reserve Bank of Philadelphia, said on Tuesday at the University of Delaware. But, “I believe as we move into the second half of the year with economic activity growing at trend or slightly above trend, the unemployment rate below its natural rate, and price pressures starting to assert themselves, policy can truly normalize.”

Others, however, thought tighter financial conditions already had increased risks to the economic outlook. Several Fed officials, according to the minutes, argued that “waiting for additional information regarding the underlying strength of economic activity and prospects for inflation before taking the next step to reduce policy accommodation would be prudent.”

Eric S. Rosengren, president of the Federal Reserve Bank of Boston and one of the 10 voting members of the policy-making committee this year, said on Tuesday that recent economic developments meant the Fed should wait before raising rates again.

“In my own view, if inflation is slower to return to target, monetary policy normalization should be unhurried,” he said at Colby College in Waterville, Me. “A more gradual approach is an appropriate response to headwinds from abroad that slow exports, and financial volatility that raises the cost of funds to many firms.”

According to the account, few officials felt confidence in their assessments. It was easy enough to leave rates unchanged, but they still had to say something. So the Fed professed honest bewilderment. “Most participants indicated that it was difficult to judge at this point whether the outlook for inflation and economic growth had changed materially,” the account said.

Mr. Feroli of JPMorgan Chase described the minutes as downbeat, emphasizing economic risks like the impact of tighter financial conditions. “The effects of these financial developments, if they were to persist, may be roughly equivalent to those from further firming in monetary policy,” the account said.

Yet in keeping with the Fed’s uncertain mood, the account also echoed recent comments by the Fed’s chairwoman, Janet L. Yellen, suggesting that investors had overreacted and could reverse themselves. “The large magnitude of changes in domestic financial market conditions was difficult to reconcile with incoming information on U.S. economic developments,” it said.

http://www.nytimes.com/2016/02/18/business/economy/fed-minutes-interest-rates.html?_r=0