August 18, 2018

Federal Reserve on Track to Raise Rates This Year

The Fed also indicated that it planned to raise its benchmark rate once more this year, following quarter-point increases in March and June. Janet L. Yellen, the Fed’s chairwoman, reinforced that expectation in a speech in Cleveland a week later.

Ms. Yellen reviewed the reasons to worry about low inflation but concluded that the weight of evidence did not warrant a shift in the Fed’s plans. “Given that monetary policy affects economic activity and inflation with a substantial lag, it would be imprudent to keep monetary policy on hold until inflation is back to 2 percent,” she said.

But the minutes of the September meeting said that “a few” Fed officials opposed another 2017 rate move, and that “several others” remained on the fence.

Officials are more aligned about the economic outlook. The account noted that all participants agreed that economic activity during the summer months was in line with the Fed’s expectations “and that the incoming data had not materially altered the medium-term economic outlook.”

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The Fed expects the recent hurricanes to bring down the figures for third-quarter growth, but it anticipates a rebound in the fourth quarter and little impact from the storms going forward.

The bigger area of dispute concerns the behavior of inflation. The Fed aims to keep inflation at an annual pace of about 2 percent, but it has undershot that goal consistently since the financial crisis, and the Fed says it expects to miss the target again this year.

A majority of Fed officials, led by Ms. Yellen, continue to subscribe to the view that inflation is just around the corner. “Many participants continued to believe that the cyclical pressures associated with a tightening labor market or an economy operating above its potential were likely to show through to higher inflation over the medium term,” the account said.

Those officials want to raise interest rates so long as the economy keeps growing.

Some also want to raise rates because they are concerned that markets are not responding to the Fed’s pressure. The Fed raises its benchmark rate to tighten financial conditions, including borrowing costs, but conditions have eased so far this year.


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William C. Dudley, the president of the Federal Reserve Bank of New York, has highlighted the market’s equanimity as a reason to keep raising interest rates, noting in a speech this month that financial conditions have eased since last December even as the Fed has raised its benchmark rate by three-quarters of a percentage point, a substantial increase.

The dissidents are less unified in their critiques. Some argue that employment has room to grow. The share of prime-age adults with jobs remains below the level before the recession. The account also pointed to the “absence of broad-based upward wage pressures.”

Some officials also see evidence that other factors may be weighing on inflation. The account noted that inflation is low in other advanced economies, and there has been some erosion in market expectations of future inflation, which can become a self-fulfilling prophecy.

Those worries have occupied a larger portion of the official minutes with each passing meeting this year, reflecting the growing puzzlement and concern among officials. “Many participants expressed concern that the low inflation readings this year might reflect not only transitory factors but also the influence of developments that could prove more persistent,” it said.

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