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MONEY

Federal Reserve’s decision to raise interest rates was a ‘close call’

The Federal Reserve’s decision to raise interest rates in December – the first rate rise in almost a decade – was a “close call” for some policymakers, according tominutes of the Fed’s meeting released on Wednesday.

While the US central bank’s decision to raise the key interest rate by 0.25% was unanimous, minutes of the 15-16 December meeting show that some members of the rate-setting committee thought it was a tight decision due to concerns about stubbornly low inflation.

“Some members said that their decision to raise the target range was a close call, particularly given the uncertainty about inflation dynamics, and emphasized the need to monitor the progress of inflation,” the minutes said.

However, the minutes said that “almost all” Federal Open Market Committee (FOMC) members were “now satisfied the committee’s criteria for beginning the policy normalization process” had been met.

“Given the economic outlook, and recognizing the time it takes for policy actions to affect future economic outcomes, the Committee decided to raise the target range for the federal funds rate to 0.25-0.5%,” the minutes said. “The stance of monetary policy remains accommodative after this increase, thereby supporting further improvement in labor market conditions and a return to 2% inflation.”

When she announced the rate rise last month, Janet Yellen, the Fed chair, said: “This action marks the end of an extraordinary seven-year period during which the federal funds rate was held near zero to support the recovery of the economy from the worst financial crisis and recession since the Great Depression.”

The Fed signalled further increases to come “with gradual adjustments in the stance of monetary policy” and argued that “economic activity will continue to expand at a moderate pace and labor market indicators will continue to strengthen”.

Some economists believe the central bank will raise rates three or four times in 2016, with some expecting one quarter-point move at every other meeting. The Fed meets eight times a year.

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When asked about the possibility of four interest rate increases a year, Stanley Fischer, vice-chairman of the Fed, told CNBC that it was “numbers in the ballpark of what the central bank will likely do … [but] we don’t know enough now to know how many there will be”.

The minutes do not refer to a specific number of rate hikes. They state that “members expected economic conditions would evolve in a manner that would warrant only gradual increases in the federal funds rate”.

The Fed next meets on 26-27 January.

Source: https://www.theguardian.com

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