Fed Minutes: It'll Soon Be Time to Start Raising Interest Rates

Susan Walsh/APFederal Reserve Chair Janet Yellen

WASHINGTON -- Some Federal Reserve officials think the U.S. economy is improving fast enough that the Fed will need to act sooner than previously thought to slow the extraordinary support it's been providing through ultra-low interest rates.

Minutes of the Fed's discussion at its July 29-30 meeting released Wednesday show that some officials thought the Fed would need "to call for a relatively prompt move" to reduce the stimulus it has supplied since the financial crisis erupted in 2008. Otherwise, these officials felt the Fed risked overshooting its targets for unemployment and inflation.

In the end, the Fed made no changes at the July meeting. It approved, 9-1, keeping its current stance on interest rates.

Still, the minutes revealed a sharp and perhaps intensifying debate within the Fed about how and when to scale back its help for a steadily improving economy.

Those who think the Fed should withdraw its support only slowly cited persistent drags on the job market despite solid hiring and a steady drop in the unemployment rate: High levels of people who have been unemployed for more than six months; many people who are working part time even though they want full-time jobs; and chronically weak pay growth.

In addition, the minutes showed that the Fed debated how to unwind the bond purchases it has made over the past six years to keep long-term rates low. Many decisions, such as how and when to start reducing its enormous investment portfolio -- amounting to nearly $4.5 trillion -- remain unsettled. The minutes showed that Fed officials expect to have more details on this process to announce before the end of this year.

The minutes were released after the customary three weeks after the Fed's policy meeting.
In its policy statement released after the discussions, the Fed acknowledged that growth was strengthening. But it indicated that it needed to see further improvement in the job market before it starts raising its key short-term rate.

It retained language in the statement that it planned to keep that rate low "for a considerable time" after it ends its monthly bond purchases.

At the meeting, the Fed reduced the bond purchases by another $10 billion to $25 billion. It was the sixth $10 billion reduction in the purchases. Before the reductions began in December, the Fed was buying $85 billion in bonds each month as a way to keep long-term interest rates low.

Charles Plosser, president of the Federal Reserve Bank of Philadelphia, dissented from the Fed move. He objected to repeating language in the Fed's statement that the first rate hike won't occur until a "considerable time" after the bond purchases end. Plosser argued that retaining this language failed to take account of the considerable improvements in the economy.

Many economists think the Fed will begin raising rates next summer, though the discussion revealed in the minutes could alter such a timetable.

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The rise in interest rates will only expose what everybody thought all along that the recovery is a joke. NJ alone has the highest foreclosure rates and plenty of visa workers hogging the jobs. Go ahead raise the rates and import more foreign workers, that should work out real good.

August 21 2014 at 11:48 AM Report abuse rate up rate down Reply

Beyond the principled discussion of Fed hubris outlined in the post below, there's also the practical discussion of Fed hubris. This article discusses raising rates, while making only passing reference to unwinding the Fed's massive balance sheet. This is precisely backwards, and puts the cart in front of the horse.

The federal funds rate may be on its way to becoming a non-issue for monetary policy. In the past, the Fed manipulated the funds rate by making reserves “scarce” or “plentiful.” It withdrew reserves to push rates up and added reserves to push rates down – a simple “supply and demand” calculation.

So, when rates went up, the Fed was tightening and when rates went down, the Fed was easing.
This was a classic monetarist view of the world. However, now that the Fed has injected trillions of dollars in “excess reserves” via QE, there is no way to make reserves “scarce” without completely unwinding the Fed’s balance sheet.

As long as banks have excess reserves, they do not need to borrow reserves from other banks to meet their reserve requirements. In fact, over the past few years, as excess reserves have piled up, the amount of actual trading in the overnight reserve market has contracted sharply.

Right now Fed watchers are talking about WHEN the Fed might tighten, but talking very little about HOW they might tighten, which is a FAR bigger issue given the massive excess reserve problem they've created.

August 20 2014 at 4:35 PM Report abuse rate up rate down Reply

On Thursday, The Federal Reserve Bank of Kansas City’s annual retreat in Jackson Hole, WY will start. The topic of discussion is: “Re-Evaluating Labor Market Dynamics.” The title itself says a lot about the Fed’s current mindset. Economists have been studying labor market dynamics for many, many decades, if not centuries. So, why does the Fed need to do any re-evaluating?

Back when Ben Bernanke was Chairman of the Fed, he targeted a 6.5% unemployment rate to start tightening. Now, Fed Chair Janet Yellen says it’s more complicated than that. There are more important measures of labor market health. Now, the unemployment rate is still 6.2%, while other measures of the labor market are far from robust. This is true even though the Fed has spent trillions on bonds, boosted its balance sheet to record levels and cut interest rates to zero. Maybe the Fed should “re-evaluate monetary policy,” or study “the impact of fiscal policy on the economy” or find “the actual efficacy of QE.” But with all those important, policy topics available, the Fed instead seeks a scapegoat for their own failure

When the Fed first started in 1913, its job was to protect the value of the US currency. Then, with passage of the Federal Reserve Reform Act of 1977, the Fed received a dual mandate – to keep BOTH the unemployment rate AND inflation low. Except the Fed has control over ONLY one thing – the amount of money circulating in the economy. And money itself cannot create jobs, or fewer part-time jobs, or increase the labor force participation rate. If printing money actually created wealth, then we should allow every citizen to counterfeit their own currency.

No monetary policy expert has argued that the US experienced the crisis of 2008 because the Fed was too tight. And no one, with credentials, argues now that the US economy is growing slowly because money is scarce. In other words, monetary liquidity was not, and has not been, a problem for the economy. As a result, any findings by the Fed that the labor market is not performing at its full potential can be seen as more proof that monetary policy is not the tool for the job.

As the US learned in the 1980s, over the long-term, monetary policy controls inflation, while fiscal policy impacts the real economy (GDP and unemployment). If the labor market is still having problems after 6 years of loose monetary policy, it must be because fiscal policy is harming potential growth. With government spending, and especially redistribution, much higher than in the 1980s and 90s, regulation a huge and growing burden, Obamacare, and higher tax rates, it’s no wonder employment and incomes are lagging.

August 20 2014 at 3:48 PM Report abuse -1 rate up rate down Reply