US central bankers are sharply divided over whether to increase interest rates again this year amid persistently weak inflation, but many still favor a hike, according to minutes released Wednesday.
Policymakers also said the economic damage from back-to-back hurricanes since August would likely be only temporary, according to a record of the Fed’s most recent meeting last month.
The continuing disagreements among members of the Federal Reserve could leave investors and market watchers guessing about the path of US monetary policy in the waning months of the year.
The Federal Open Committee, the Fed panel which sets US monetary policy, has twice raised rates so far in 2017 despite the fact that inflation has remained tame in the face of steady job creation and falling unemployment.
Economists have been baffled by the circumstances and Fed members have disagreed since 2016 on the near-term threat that prices will rise and that the economy will overheat.
A ‘vocal minority’
The minutes, which recount discussions among FOMC members at their on September 19 and September 20, showed such disagreements were no closer to being resolved despite the passage of time.
At the September meeting, the Fed left rates untouched at their current range of 1 percent to 1.25 percent and forecast one final rate hike in 2017 as well as three more in 2018.
Observers widely expect that if the Fed chooses to adopt a third rate hike in 2017, it will do so at its final meeting of the year in December.
“There is a vocal minority that wants to see inflation rise before hiking rates,” Chris Low of FTN Financial said in a note to clients.
“But the majority continues to believe a tight labor market will produce inflation and the Fed must raise rates now (well, in December) to prevent inflation shooting well past two percent.”
The minutes said “many participants” thought another increase in 2017 was “likely to be warranted.”
Raising rates an “unduly slow pace” could cause price pressures to spike and encourage risk-taking by investors, they argued, and delaying too long could force the Fed in the future to jack up rates suddenly, harming the economy.
However, the account of the meeting made clear that an important faction of policymakers still see no clear reason to act immediately.
“Many participants,” the minutes said, believed low inflation could be a longer-term trend. “And it was noted that some patience in removing policy accommodation while assessing trends in inflation was warranted.”
A ‘shallow’ rate trajectory?
Among this group, a few believed “no further increases” were called for, adding that “the upward trajectory of the federal funds rate might appropriately be quite shallow.”
A key measure of inflation that is closely watched by the Fed — tracking personal consumption but excluding volatile food and fuel prices — has remained below the Fed’s two percent target for more than five years.
According to the minutes, “a few” meeting participants called for delaying rate hikes until economic indicators “confirmed that the low readings on inflation this year were not likely to persist.”
Following the minutes’ release, futures markets remained largely convinced of a December rate hike but softened marginally, with the probability of a hike falling 1.1 percentage points to 86.7 percent.
FOMC members were not divided over how hurricanes Harvey, Irma and Maria, which tore a path of destruction through US territory between August and September, were likely to affect the economy.
“They expected growth of real GDP in the third quarter to be held down by the severe disruptions caused by the storms but to rebound beginning in the fourth quarter as rebuilding got under way,” the minutes said.