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Fed is being 'patient' on interest rates

August 21, 2017

The Federal Reserve engaged in an intense debate in July about the path of U.S. inflation after a spate of surprisingly low readings, raising questions about whether the central bank will raise interest rates again this year.

 

The Fed’s policy-setting group appeared more unified on a plan to announce in September a long-awaited draw down of the bank’s huge $4.5 trillion asset portfolio, according to minutes of the July meeting released Wednesday. The central bank vastly expanded it bond holdings to unprecedented levels to prop up an economy devastated by the 2007-09 recession.

 

Although a few members wanted to announce a starting date in July, “most preferred to defer that decision until a coming meeting” to allow Fed officials to better assess the health of the economy.

 

The Fed is probably on track to go public at its next meeting Sept. 19-20 given a rebound in the U.S. economy after a slow start in 2017. During the summer hiring strengthened, layoffs remain extraordinarily low and retail sales have surged, indicating consumers are still optimistic.

 

The Fed plans to shrink its hoard of Treasury and mortgage-backed securities over a period of several years, a move that would gradually push up the cost of borrowing.

The bigger debate in July revolved around inflation.

 

The bank had been signaling it would raise its benchmark fed-funds rate one more time this year until the surprising slowdown in inflation. Yet the Fed’s own staff in July slightly reduced its 2017 forecast for inflation as many senior officials saw a greater likelihood that “inflation might remain below 2% for longer than they currently expected.”

 

Some senior Fed officials even suggested the central bank “could afford to be patient” in deciding when to raise interest rates again because of persistently low inflation.

 

Yet a majority still expected inflation to end up around its 2% target in the next year or so, pointing to an ultra-tight labor market. Some also warned that keeping rates too low could lead to greater risks of a financial bubble that threatens the economy again.

 

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