WASHINGTON — The Federal Reserve raised interest rates on schedule during the first half of 2017, but its plans for the second half of the year are less clear, according to minutes of the Fed’s most recent meeting in June.
Officials debated how soon to start reducing the Fed’s securities portfolio, as the sluggishness of inflation and the exuberance of investors continued to concern them.
At the June meeting, the Fed raised its benchmark interest rate for the third consecutive quarter, to a range between 1 percent and 1.25 percent. It also published a plan for paring its substantial holdings of $4 trillion in Treasuries and mortgage-backed securities, acquired after the financial crisis to further reduce borrowing costs for businesses and consumers.
The Fed has said that it wants to begin the balance sheet plan this year. The minutes of the June meeting said several officials wanted to start “within a couple of months,” while others favored waiting, suggesting that officials are debating whether to begin in September or wait until December. The Fed published the meeting account Wednesday after a standard three-week delay.Continue reading the main story
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Officials also disagreed about the likely impact of the plan. Some argued that balance sheet reductions were effectively the same as rate increases, while others predicted the plan would have only a modest economic effect.
The differences are narrow because Fed officials remain confident in the strength of the economy. Janet L. Yellen, the chairwoman of the Fed, and other Fed officials have made clear that they are committed to reducing the Fed’s support for economic growth after years of hesitation. The Fed plans to raise its benchmark rate once more this year, which it says would push the rate to a neutral level that neither encourages nor discourages growth.
But there are signs of emerging differences among Fed officials about the importance of two unexpected developments.
Some Fed officials worry that investors are not responding to the recent rate increases. It has become cheaper and easier to borrow money in many cases, according to measures of financial conditions. That is the opposite of the effect the Fed intended. The minutes said some participants saw evidence that investors were taking larger risks, and a few were concerned about “a buildup of risks to financial stability.”
William Dudley, the president of the Federal Reserve Bank of New York, has suggested the Fed might need to raise rates more quickly if markets continue to brush aside its retreat. But Ms. Yellen played down the extent of the Fed’s concerns at a news conference after its June meeting.
“We’re not targeting financial conditions,” she said. “We’re trying to generate paths for employment and inflation that meet our mandated objectives.”
The low level of inflation, on the other hand, is causing some officials to question whether the Fed is moving too quickly. The pace of price increases has slowed in recent months, forcing the Fed to back away from its predictions that this would be the year that inflation approaches the Fed’s desired 2 percent annual pace.
The minutes acknowledged what were described as “surprisingly low recent readings” on inflation, but said most officials continued to expect a return to normal.
One reason for this optimism is that Fed officials attribute the recent sluggishness to lower prices on a few kinds of products, including cellphone service and prescription drugs. The minutes noted, however, that “several participants expressed concern that progress toward the committee’s 2 percent longer-run inflation objective might have slowed and that the recent softness in inflation might persist.”
Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, cited his concern about weak inflation as a reason that he voted against a rate increase at the June meeting. The minutes said Mr. Kashkari “preferred to await additional evidence that the recent decline in inflation was temporary.”
While he was the only member of the Federal Open Market Committee to dissent, the minutes noted that “a few” Fed officials who supported the rate increase cautioned the weakness of inflation might require the Fed to slow its rates increases.
Corporate excitement about the Trump administration also may be waning, the minutes said. Some executives see less chance of changes in fiscal policy, like tax cuts, that might accelerate economic growth, the minutes said.
They also noted that some large companies are curtailing spending “in part because of uncertainty about changes in fiscal and other government policies.”