Many fed Officials Were Inclined to Keep Zero Rates Longer
Comment of the Day

February 18 2015

Commentary by David Fuller

Many fed Officials Were Inclined to Keep Zero Rates Longer

Here is the opening of this topical and important subject, reported by Bloomberg:

(Bloomberg) -- Federal Reserve policy makers judged that risks facing the U.S. economy argued for keeping interest rates near record lows for longer, minutes of their most recent policy meeting showed.

“Many participants indicated that their assessment of the balance of risks associated with the timing of the beginning of policy normalization had inclined them toward keeping the federal funds rate at its effective lower bound for a longer time,” according to a record of the Jan. 27-28 Federal Open Market Committee meeting released on Wednesday in Washington.

The committee, while considering risks to be “nearly balanced,” pointed to a strengthening dollar, international flash points from Greece to Ukraine, and slow wage growth as weakening the case for the first rate rise since 2006.

The FOMC said after its last meeting it “can be patient” as it considers when to raise the benchmark interest rate, even as it described the labor market as “strong.” A report the following week showed payrolls rose more than forecast in January to cap the strongest three-month gain in 17 years.

Stocks pared losses and Treasuries rose after the report. The Standard & Poor’s 500 Index was down less than 0.1 percent to 2,098.96 at 2:03 p.m. in New York. The yield on the 10-year Treasury note fell five basis points, or 0.05 percentage point, to 2.09 percent.

Members of the committee discussed their communication strategy at length.

“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. “Some expressed the concern that financial markets might overreact.”

David Fuller's view

I think they are right to delay a rate hike.  The Dollar’s strong rise since last July is already a headwind for US exporters, at a time when the previously robust energy sector is weakening due to the slump in oil prices.  Moreover, the global economy is still soft.  There will be plenty of time to lift rates closer to yearend or in 1Q 2016, assuming the economy remains steady, before the next US presidential election campaign is fully underway.  

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