Federal Reserve policymakers said last month that recent global and market volatility could hobble the U.S. economy, especially if it persists, and suggested the impact could lessen the need to raise interest rates, according to minutes of the Fed’s January 26-27 meeting.
The Fed officials agreed that the effect of the turbulence was uncertain, but the minutes appear to express more concerns about its potential impact than was evident in the statement released after the meeting. The meeting summary raises further doubts about a March rate increase and reflects similar worries voiced by Fed Chair Janet Yellen on Capitol Hill last week.
The overseas and market troubles, including a sharp drop in oil and stock prices, “had the potential to further restrain domestic economic activity” as oil producers and foreign countries further scale back investment, the minutes say. In its statement, the Fed had avoided making such a direct link between the recent distress and the U.S. economy.
At the meeting, the Fed kept its benchmark rates unchanged at 0.4% and raised some questions about a March hike amid recent overseas and market turmoil set off largely by China’s slowdown and plummeting oil prices. But the statement reiterated the central bank still plans to lift its benchmark rate gradually this year amid an improving labor market after hoisting it for the first time in nine years in December.
In the statement, the Fed removed its previous appraisal of the risks to its outlook as “balanced.” Instead, it said it’s “closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of the risks to the outlook.”
The minutes reveal that Fed officials used that language because they were uncertain about the ultimate impact of the global and market developments. “The implications of the available information were not sufficiently clear to allow members to assess the balance of risks to the economic outlook,” the minutes say.
Still, the officials “observed that if the recent tightening of global financial conditions was sustained, it could be a factor amplifying downside risks.”
In fact, the effects of the strains, “if they were to persist, may be roughly equivalent to those from further” increases in interest rates. A strong dollar hurts exports and low oil and stock prices can discourage investment, tamping down economic activity and mitigating the need for the Fed to raise rates.
The officials said the strains in financial markets has dampened business sentiment, which could further hamper investment, the minutes say.
The account also shows policymakers have grown increasingly concerned about persistently low inflation. Although they expect inflation to pick up as the effects of a strong dollar and cheap oil fade, some are worried that feeble price increases could linger. Several said they need to see “direct evidence that inflation was rising” toward the Fed’s annual 2% goal before agreeing to further rate increases.
In her congressional testimony, Yellen was asked if the developments could derail the Fed’s plans to boost rates gradually this year. She said, “the answer is maybe, but the jury is out.”
In December, Fed policymakers’ forecasts suggested there would be four quarter percentage point rate increases in 2016, almost certainly including a bump in March. Now, many economists expect just two moves, in June and December.