Last month, in what will likely be viewed in hindsight as an ill-fated attempt to begin the long and painful process of normalizing monetary policy, the Fed "went there." Janet Yellen raised rates.
Investors were meant to take solace in the FOMC's use of the term "gradual" to describe the trajectory for rates going forward, as well as from the apparent unanimity, but as is becoming more clear with each passing week, "liftoff" was a policy mistake and may well go down as the worst timed rate hike in history.
On Wednesday we get a peak into the minds of the Eccles cabal with the release of the December meeting minutes. Here to read the tea leaves is the incomporable Jon Hilsenrath.
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Via WSJ
Federal Reserve officials expressed glimmers of trepidation as they decided at a mid-December policy meeting to raise short-term U.S. interest rates after keeping them near zero for seven years.
Though the decision to raise rates was unanimous, some officials expressed concern about lingering low inflation and the stifling effects on the U.S. economy of a strong U.S. dollar and slow growth overseas.
“Because of their significant concern about still-low readings on actual inflation and the uncertainty and risks present in the inflation outlook, (officials) agreed to indicate that the (Fed) would carefully monitor actual and expected progress toward its inflation goal,” the Fed said in minutes of its Dec. 15-16 policy meeting released Wednesday.
Some officials said they wanted to see confirmation that inflation was actually rising as they looked forward to additional rate increases in 2016, the minutes said. Some also said it was a “close call” as to whether they should move in December.
Inflation has run below the Fed’s 2% goal for 3½ years.
The Fed tries to keep inflation near that goal to diminish disturbances to the economy. Persistently low readings since the financial crisis suggest underlying weakness in overall economic activity, even though employment has risen and the jobless rate declined.
In theory, inflation should pick up as joblessness falls and slack in the economy diminishes. With that in mind, “nearly all” of the Fed officials in the room at the meeting had become “reasonably confident” inflation would rise in the months ahead, the minutes said. Months earlier, the Fed had set “reasonable” confidence on inflation as a benchmark for deciding to raise rates.
Still, officials pointed to factors that could throw their inflation outlook off course: Additional declines in oil prices could further weigh on inflation readings, as could continued appreciation of the dollar.
“Although almost all still expected downward pressure on inflation from energy and commodity prices would be transitory, many viewed the persistent weakness in those prices as adding uncertainty or imposing important downside risks to the inflation outlook,” the minutes said.
The Fed said at the meeting and reiterated in its minutes that officials planned to move gradually on additional interest-rate increases because of these and other uncertainties.
They have tentatively penciled in four rate increases in 2016, according to projections they made public in December. The minutes emphasized their intention to take a go-slow approach.