The persistence of slow inflation was the dominant topic at the Federal Reserve’s most recent policy-making meeting in September, but most officials were still inclined to raise the Fed’s benchmark interest rate later this year.
The Fed is likely to raise rates so long as the medium-term economic outlook remains unchanged, according to an official account of the meeting that the Fed published on Wednesday.
The account said that recent hurricanes had not disrupted that outlook. The Fed expects slower growth for a few months, but it does not expect a long-term effect.
The Fed next meets Oct. 31 and Nov. 1, but investors expect the Fed will wait to raise its benchmark rate at its final meeting of the year, in December. The Fed has held rates at a low level to encourage economic growth; by raising rates, it is slowly ending that stimulus campaign.
The Fed said after the September meeting that it would begin to reduce its holdings of Treasury securities and mortgage-backed securities, which it accumulated beginning in 2008 as part of the effort to reduce borrowing costs for businesses and consumers. The Fed is now shaving $10 billion from its portfolio each month. It will add another $10 billion to the monthly total each quarter next year, until it reaches a monthly pace of $50 billion.
The Fed also indicated that it planned to raise its benchmark rate once more this year, following quarter-point increases in March and June. In economic projections released after the meeting, 12 of the 16 officials on the Federal Open Market Committee predicted a third rate hike. Janet L. Yellen, the Fed’s chairwoman, reinforced that expectation in a speech in Cleveland a week later.
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.
Charles Evans, the president of the Federal Reserve Bank of Chicago, is among the skeptics. “There’s room for a very honest discussion later this year as to whether or not it’s the right time to raise rates,” Evans told Bloomberg News on Wednesday.
The divisions are not 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.”
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 issue is 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 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.
“The Fed’s models tell them that an economy at full employment eventually produces more inflation down the road and they want the Fed funds rate to be back to normal levels before that happens,” said Chris Rupkey, chief financial economist at Mitsubishi UFJ Financial Group.
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.
The yield on the benchmark 10-year Treasury has fallen almost 5 percent this year; the decline was even deeper before it began to bounce back last month.
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.
This article was originally published in the New York Times.