Federal Reserve committee divided on raising interest rates

Many United States Federal Reserve members are inclined to keep interest rates low for longer, according to minutes of their January meeting which underscore the central bank's cautious stance towards normalising monetary policy.

The federal open market committee held a lengthy discussion of its strategy for raising rates as it primes the markets for eventual lift-off from the current 0-0.25 per cent.

The minutes reiterated that rate-setters generally expected inflation to return to the Fed’s 2 per cent objective as the US labour market strengthens and transitory effects of low energy prices dissipate.

Rate cuts by leading central banks overseas had probably reduced the risks to US growth, the minutes said.

However, the minutes also showed a committee that remains divided as to when to begin raising interest rates.

Many officials said they feared a “premature” rise in rates could dampen the apparently solid economic growth and labour market recovery.

“Many participants indicated that their assessment of the balance of risks associated with the timing of the beginning of policy normalisation had inclined them toward keeping the federal funds rate at its effective lower bound for a longer time,” the minutes said.

However, the minutes also noted “several” members told the meeting they were worried that a late rise in rates could lead policy to be “excessively accommodative” which could lead to high inflation.

Sufficient time

Some observed that rates had already been kept low for a sufficient length of time.

The Fed has been discussing whether to keep language saying it will be patient about raising rates, meaning waiting at least two more policy meetings.

Some policy makers stressed the risks of a market overreaction if they drop their pledge to be “patient” in raising rates.

“Many participants regarded dropping the ‘patient’ language in the statement, whenever that might occur, as risking a shift in market expectations for the beginning of policy firming toward an unduly narrow range of dates,” the minutes said. – Copyright The Financial Times Limited 2015