US central bankers debating the merits of raising interest rates last month described the decision as a close call, with several saying a rate hike was needed “relatively soon,” minutes of the September meeting showed.
“Several members judged that it would be appropriate to increase the target range for the federal funds rate relatively soon if economic developments unfolded about as the committee expected,” the minutes from the Sept. 20-21 gathering in Washington showed. “It was noted that a reasonable argument could be made either for an increase at this meeting or for waiting for some additional information on the labor market and inflation.”
The Federal Open Market Committee left the benchmark lending rate unchanged in a range of 0.25 percent to 0.5 percent for the sixth straight meeting last month, even as a majority of the 17 participants still forecast at least one hike this year.
The S&P 500 Index extended gains following the Fed release as officials were seen debating the timing for higher rates. The dollar remained higher and bonds trimmed earlier losses.
“The probability of a rate hike is very likely by the end of the year,” said Randall Kroszner, an economics professor at the University of Chicago Booth School of Business and a former Fed governor. “Unless there’s some major shock, I think they’re pretty much on track to move in December,” he told Bloomberg Television in an interview.
Kansas City Fed President Esther George, Cleveland’s Loretta Mester and Eric Rosengren of Boston dissented at the meeting in favor of higher rates. The minutes showed the close decision was also reflected in the comments of non-voting members.
“Among the participants who supported awaiting further evidence of continued progress toward the committee’s objectives, several stated that the decision at this meeting was a close call,” the minutes stated.
Fed officials have deferred rate increases at every meeting this year as the U.S. economy suffered a number of setbacks, from slowing Asian growth to the U.K.’s vote to leave the European Union. Inflation that’s been below the central bank’s 2 percent target for more than four years has reduced the urgency to hike.
Uncertainties over the economic outlook and the desire by the committee to assure that job growth remains strong are likely to delay another rate increase until December, federal funds futures traders are betting. Fed officials next meet Nov. 1-2, just before the U.S. election on Nov. 8.
“Many members remarked that there were few signs of emerging inflationary pressures or that progress on inflation had been slow,” the minutes stated. Among participants in the meeting, “a substantial majority now viewed near-term risks to the economic outlook as roughly balanced,” they stated.
The committee also debated the “potential benefits” of allowing the labor market to dip below their estimates of full employment. Several participants said that could pose risks to the economic expansion if the Fed had to tighten rapidly, while others noted there was greater scope for growth because such a strategy would help absorb remaining labor-market slack.
At the meeting, several officials cautioned about the potential costs of waiting too long to raise rates.
“Several participants expressed concern that continuing to delay an increase in the target range implied a further divergence from policy benchmarks based on the committee’s past behavior or risked eroding its credibility” especially because recent data supported the committee’s outlook, the minutes stated.
A broad measure of unemployment that includes those working part time but who want full-time work has shown little improvement over the past year.
Payrolls rose by 156,000 last month, bringing the monthly average to 178,000 this year compared with 229,000 last year. The labor force participation rate, a measure of engagement by the working-age population, rose last month — possibly an early sign that Yellen’s bet that tighter labor markets would pull more people back into the workforce is paying off.
The Fed’s preferred price benchmark rose 1.7 percent, minus food and energy, in August.
The Atlanta Fed’s GDPNow tracking model for the third quarter has slowed to 2.1 percent from 3.3 percent about a month earlier.