Fed steadies course despite economic concerns, minutes reveal
WASHINGTON — Federal Reserve policymakers discussed a variety of economic threats at their October meeting — from turbulent financial markets to overseas weakness — but decided to move forward with plans to end their landmark bond buying program.
Minutes of the Fed’s Oct. 28-29 meeting, released Wednesday, showed that Fed officials grappled with a number of developments, from sharp moves in stock prices to increased signs of weakness in key regions such as Europe and Asia. They also expressed concern that inflation, which has been running below the Fed’s target of 2 percent, could drift lower because of falling energy prices and a strengthening U.S. dollar.
A number of Fed officials noted that economic growth might be slower over the medium term than expected if foreign economic conditions or financial markets were to deteriorate significantly, the minutes said. But the officials expressed confidence that the U.S. economy is on solid footing and expected to keep improving.
The minutes cited the “somewhat weaker economic outlook and increased downside risks in Europe, China and Japan.” But it said Fed officials believe the impact likely will be “quite limited” on the U.S. economy, in part because they expect that the slowdown in overseas demand likely would be less severe than initially feared.
Wall Street staged a big rally after release of the September meeting minutes as investors assumed that the Fed would delay a rate hike because of concerns about weakness overseas. However, the release of the October minutes had little market impact. Economists said the comments did not alter their expectation that the first rate hike probably will take place around June.
“The timing will depend on the data … nothing very definitive,” said Jim O’Sullivan, chief U.S. economist at High Frequency Economics.
The minutes showed that for a second meeting, there was a debate over the language outlining the pace of interest rate hikes. Board members debated whether to remove language Fed officials have used since the spring that they expect to keep a key short-term interest rate low for a “considerable time” after halting monthly bond purchases.
The Fed decided to keep the “considerable time” wording because officials worried that its removal could be misinterpreted and cause markets to drive interest rates higher and harm the recovery.
Private economists do not expect the Fed to begin raising interest rates until mid-2015 and nothing revealed by the discussion in the minutes was likely to alter their view.
The minutes of the Oct. 28-29 meeting were released with the customary three-week delay. At the October meeting the Fed announced that it was ending its bond buying program, which it had been gradually reducing since last December. That program was aimed at keeping long-term interest rates low.
The statement did drop a reference it had been making to a “significant underutilization’ of labor market resources. Instead, it said that improving labor market indicators suggested that the “underutilization” of labor market resources was “gradually diminishing.” The change was viewed as a sign that the Fed’s concerns about weakness in the labor markets had lessened somewhat.
The central bank has kept its target for a key short-term rate at a record low near zero since December 2008.