WASHINGTON – Federal Reserve policymakers expressed growing concerns in their meeting recently about potential threats towards the U.S. economy, including turbulence in financial markets, plunging oil prices and slowing development in China along with other emerging markets.
Minutes of their discussions released Wednesday showed Fed officials acknowledging that the developments managed to get difficult to forecast growth and inflation prospects. As a result, they decided it would be prudent to defer a hike in interest rates.
While Fed officials continued to convey confidence within the strengthening labour market, they were less bullish on other parts of the economy for example manufacturing.
“Most participants established that it had been hard to judge at this time whether the outlook for inflation and economic growth had changed materially, however they believed that uncertainty all around the outlook had increased because of because of recent financial and economic developments,” the minutes said.
Its brief policy statement removed language it had been by using their officials judged the potential risks facing the economy as “balanced.” Most Fed officials felt there is not enough evidence to say the total amount of risks had “changed materially,” though some officials did believe the downside risks had increased, according to the minutes.
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Among the threats to U.S. growth, the minutes cited the slowdown in China and falling commodity prices that may hurt growth prospects in emerging market nations that produce those commodities. The Fed officials also discussed the steep declines available prices which had occurred since the beginning of the season.
In December, the Fed had lifted its target for overnight bank lending from a record low to a new range of 0.25 % to 0.5 percent – the first hike after seven years of near-zero rates. Additionally, it released projections that indicated four additional quarter-point moves in 2016.
But since the start of this season, global financial markets have been rocked by disclosures that China, the world’s second largest economy, might be slowing a lot more than previously believed. Oil prices have tumbled, as the U.S. dollar has strengthened. Both of those developments might make it tougher for the Fed to achieve its inflation target.
Many private economists have cut their forecasts for Fed rate hikes this season from four down to two or fewer.
Fed Chair Janet Yellen acknowledged the darker economic landscape in Congressional testimony last week. But she said it was too early to understand if the new risks would be severe enough to change interest rate policies.
Yellen said the Fed was not on a “pre-set” course for rate hikes and would assess at its next meeting on March 15-16 whether recent developments have slowed the U.S. economy or threatened to derail the Fed’s objective of pushing inflation back toward 2 per cent.
Recent comments using their company Fed officials also provide sounded some caution.
In an address Tuesday, Eric Rosengren, president from the Fed’s Boston regional bank and a voter this season on interest rate policies, said that the worldwide weakness may push back the Fed’s timetable on inflation.
“In my own view, if inflation is slower to return to its target, monetary policy normalization ought to be unhurried,” Rosengren said. “A more gradual approach is an appropriate response to headwinds from abroad that slow exports and financial volatility that enhances the price of funds to many firms.”
