Federal Reserve officials committed to a historic vote to raise interest rates in December despite confusion over why inflation is still low, a new account of the meeting published Wednesday shows.
Minutes from the Dec. 15-16 meeting state that, for some of the voters on the Fed’s monetary policy committee, the decision to raise rates from zero for the first time since 2008 was a “close call.”
A particular source of unease for the Fed was “uncertainty about inflation dynamics,” the minutes state, and members who went along with the rate hike “emphasized the need to monitor the progress of inflation closely.”
Part of the issue is that inflation has been running well below the Fed’s 2 percent target. In the gauge favored by the Fed, inflation has been just 0.4 percent over the past year as oil prices have dropped, and inflation hasn’t reached 2 percent since 2012.
Chairwoman Janet Yellen and other Fed members have argued that low inflation is temporary. They say downward pressure on overall prices from collapsing oil and the stronger dollar is likely to be “transitory” and inflation is likely to pick up as the U.S. economy gets stronger and unemployment falls.
Those predictions, however, have hinged on a key assumption, namely that people’s expectations for inflation remain stable. Yellen dedicated a high-profile speech in Massachusetts in September to spelling out her logic. If businesses and workers start to believe that lower inflation near zero is the norm, than it might become a self-fulfilling expectation. In that case, inflation could fall short of the Fed’s goal for years, with the possible outcome that the recovery would also be slower than it would have been with looser money.
In fact, measures of inflation expectations have been falling recently. Bond market futures have been hinting at inflation well below 2 percent over the next few years. More recently, survey-based measures of inflation expectations, such as ones in the survey of consumers conducted by the University of Michigan, have shown inflation expectations dropping.
The minutes showed that the December meeting included disagreement among Fed members over just how to interpret those movements in expectations.
Some members waved off concerns about the drop in expectations, suggesting that overall people have stable expectations for inflation. Others, though, “expressed concerns that inflation expectations may have already moved lower, or that they might do so if inflation persisted for much longer at a rate below the committee’s objective.”
In other words, the exact workings of inflation amid a drop in oil prices remains a live debate within the Fed this year.
