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.
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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.”
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1 comment:
The increase in the benchmark interest rates would certainly add some burden on the people who are willing to go loans in the near future. Although it is not clear what are the future plans of Fed but, the short term shock can lead to losses for businesses as of now. For many it would be difficult to incorporate this into their income tax return
However, liked the part where it said "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."
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