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Key passages Fed minutes

for the time pressed, lol

Federal Reserve officials held off on raising short-term interest rates last month citing concern about the outlook for inflation, according to minutes of their September meeting, released Thursday. But the debate continues over whether the economy will soon be strong enough to justify the first interest-rate increase in nearly a decade.
Here are some key passages--in italics--from the minutes of the Fed's policy-making committee. As usual, they were released with a three-week lag and don't identify the speakers by name or specify the exact numbers of officials holding the views expressed. ("Policy firming" and "policy normalization" are Fed lingo for raising rates.)
Most Participants Thought They Would Raise Rates by Year-End
"Most participants continued to anticipate that, based on their assessment of current economic conditions and their outlook for economic activity, the labor market, and inflation, the conditions for policy firming had been met or would likely be met by the end of the year."
Labor-Market Goal Is Close; Inflation Goal Less Certain
The Fed has a dual mandate from Congress to steer the economy toward full employment and stable prices. Officials are a lot more confident about nearing that first goal.
On the labor market: "In assessing whether economic conditions had improved sufficiently to initiate a firming in the stance of policy, many members said that the improvement in labor market conditions met or would soon meet one of the Committee's criteria for beginning policy normalization."
On inflation: "But some indicated that their confidence that inflation would gradually return to the Committee's 2 percent objective over the medium term had not increased, in large part because recent global economic and financial developments had imparted some restraint to the economic outlook and placed further downward pressure on inflation in the near term."
What Would Boost Their Confidence?
A key question for Fed watchers is what would give central-bank officials enough confidence in the inflation outlook to raise rates? They need to see at least moderate economic growth and improvements in the labor market. They would really like to see wages rise, but would consider raising rates without that piece of evidence.
"Most members agreed that their confidence that inflation would move to the Committee's inflation objective would increase if, as expected, economic activity continued to expand at a moderate rate and labor market conditions improved further."
"A few mentioned that a pickup in wage increases could bolster their confidence that resource utilization had tightened sufficiently to help move inflation toward the Committee's objective, but they did not view an acceleration in wages as a necessary condition for gaining such confidence."
The Pros and Cons of Raising Rates
The minutes provided a nice overview of the pros and cons of raising rates too soon vs. too late.
Some officials worried about moving too soon: "Some participants were concerned that the downside risks to inflation could be realized if the target range for the federal funds rate was increased before it was clear that economic growth would remain at an above-trend pace and downward pressures on inflation had abated. They also worried that such a premature tightening might erode the credibility of the Committee's inflation objective if inflation stayed at a rate below 2 percent for a prolonged period."
"It was noted that monetary policy was better positioned to respond effectively to unanticipated upside inflation surprises than to persistent below-objective inflation, particularly when the federal funds rate was still near its effective lower bound."
Some worried about moving too late: "Some other participants, however, expressed concerns about delaying the start of normalizing the target range for the federal funds rate much longer. For example, a significant delay risked an undesired buildup of inflationary pressures or economic and financial imbalances that would be costly to unwind and that eventually could have adverse consequences for economic growth."
"In addition, a prompt decision to firm policy could provide a signal of confidence in the strength of the U.S. economy that might spur rather than restrain economic activity."
The Big Balance Sheet
Fed officials' key debate right now is over when exactly to raise interest rates. A debate that has been getting less attention is what to do about the Fed's enormous balance sheet. Three rounds of bond purchases left the central bank with more than $4 trillion in assets. And whenever one of those assets matures, the Fed has been reinvesting the proceeds by purchasing a new asset to replace it. The Fed's staff gave a presentation on their strategy for when to end this reinvestment policy.
Many economists have suspected that the Fed will cease reinvestment not too long after beginning to raise interest rates, but the staff presentation suggested it might be worthwhile to continue reinvesting assets until interest rates had returned to normal levels:
"If substantial adverse shocks occurred, continuing reinvestment until normalization of the level of the federal funds rate was well under way could help avoid situations that would warrant a larger reduction in the federal funds rate than perhaps could be accomplished given the constraint posed by the effective lower bound to nominal interest rates."
Write to Josh Zumbrun at [e-mail]

(END) Dow Jones Newswires
10-08-15 1455ET
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