Fed: Raising rates too soon could hurt recovery

Paul Davidson | USA TODAY

Federal Reserve policymakers expressed growing concerns last month about low inflation and said they were inclined to keep interest rates near zero for longer to avoid derailing the recovery, according to minutes of the Fed's Jan. 27-28 meeting.

Fed officials gave no further signal of when they plan to raise short-term rates for the first time since the 2008 financial crisis. But they indicated that they see more risk in raising rates earlier than anticipated rather than later.

"Many participants observed that a premature increase in rates might damp the apparent solid recovery in real activity and labor market conditions," the minutes said.

Bond markets cheered. Ten-year Treasury yields fell from 2.14% to 2.08%.

The meeting summary added that "the balance of risks" had inclined policymakers to keep the federal funds rate near zero "for a longer time."

In December, Fed policymakers expected the first rate hike to occur around June, based on their median interest rate forecast.

But "it looks increasingly likely that the Fed will wait longer," economist Paul Edelstein of IHS Global Insight wrote in a note to clients.

The minutes appear to reflect greater concerns about meager inflation than was indicated by the Fed's post-meeting statement last month. The statement largely extolled recent strong job gains and noted that low inflation was mostly the result of the "transitory" effects of tumbling oil prices.

The minutes, however, say that several policymakers viewed the lingering weakness in core inflation, which excludes volatile food and energy costs, "as a concern." The report added that a few officials fretted that because of weak wage growth, inflation "could take longer to return" to the Fed's annual 2% goal than anticipated.

At the same time, several officials noted that waiting too long to raise rates could lead to "undesirably high inflation."

In the January statement, the Fed said "it can be patient" as it weighs an initial bump in rates. Fed Chair Janet Yellen has said that language means rates won't rise for at least two meetings, or until June, at the earliest.

At the meeting,a number of policymakers said they wanted to see further improvement in the labor market before raising rates, the minutes show. Although monthly job gains averaged 260,000 in 2014 — the strongest year for payroll growth since 1999 — wage gains have been puny.

Many policymakers indicated that further improvement in the job market "would help bolster their confidence in the likelihood of inflation" moving toward the Fed's 2% target.

The Fed in recent months has been grappling with the unusual crosscurrents of an accelerating economy and inflation held down by plunging oil prices and a strong dollar. Low inflation can lead to deflation, or falling prices, which can weaken the economy and even trigger a recession.

Fed officials also have been voicing growing worries about global economic trouble, citing it as a significant risk to the U.S. economy at the December meeting. In its post-meeting statement in January, it added international developments to the issues it must monitor.

At the January meeting, however, policymakers noted that several recent developments "had likely reduced the risks to U.S. growth," highlighting recent actions by foreign central banks, the minutes said. The European Central Bank, for example, agreed to buy 1.1 trillion euros in bonds to hold down interest rates and pump cash into the eurozone's sluggish economy.

While that move should help bolster foreign demand for U.S. exports, in the short term it also strengthens the dollar, which typically hurts exports. Last month, a few policymakers "pointed to the risk that the dollar could appreciate further."