Federal Reserve policy makers debating their outlook for interest rates last month expressed concern that the fall in commodity prices and the rout in financial markets increasingly posed risks to the U.S. economy.
Declining stock and oil prices, doubts about China, indications of declining inflation expectations in markets and other factors left officials split in two camps—those who believed that risks to the economy were materializing and those who wanted to wait and see.
“Participants judged that the overall implication of these developments for the outlook for domestic economic activity was unclear, but they agreed that uncertainty had increased, and many saw these developments as increasing the downside risks to the outlook,” the Fed said in minutes of the Jan. 26-27 policy meeting, which were released Wednesday with their regular three-week lag.
Policy makers, who projected in December that they’d raise interest rates four times this year, are grappling with the fallout of market turbulence that has cast doubt over the economic outlook globally. Fed Chair Janet Yellen suggested in congressional testimony last week that the central bank could delay its plans for tighter policy to assess how the economy reacts to current headwinds.
The minutes go into more detail than the FOMC’s statement on policy makers’ concerns about the risks to the U.S. economy. While voting members “generally agreed” they couldn’t assess the balance of risks to the outlook in the statement, officials “observed that if the recent tightening of global financial conditions was sustained, it could be a factor amplifying downside risks,” according to the report.
The Fed in January held its benchmark short-term interest rate, called the federal funds rate, steady at between 0.25% and 0.5%. The central bank increased that rate in December and penciled in four more rate increases for 2016.
The Fed’s next policy meeting is March 15-16. The trepidation officials expressed in the minutes of the January meeting suggested the bar for a March rate increase had already been raised, and that bar is likely higher now in light of continued market turbulence and sinking inflation expectations. Traders in futures markets see little to no chance of a rate increase in March and a chance the Fed may not move rates at all this year.
The Fed’s policy statement in January was striking because officials decided not to make an official judgment about what they call the “balance of risks” to the economy—in other words whether they believed the economy was likely to perform more poorly than their forecasts or exceed their expectations.
Indeed, the minutes showed staff economists saw a risk that economic growth and inflation would underperform expectations and unemployment could be higher than forecast, “mainly reflecting the greater uncertainty about global economic prospects and the financial market turbulence in the United States and abroad.”
The Fed used the word “uncertain” or “uncertainty” 14 times in the minutes. It used the phrase “downside risk” five times and “downside” seven times, compared with two times for upside.