Fed policy on interest rates getting murkier, meeting records show

According to minutes released Wednesday, a Fed meeting last month included disagreement over how the US central bank should proceed in setting monetary policy, at a time when the economy is improving but unemployment is still high.

On the surface, the Federal Reserve’s policy meeting last month was pretty straightforward. The Fed continued to “taper” the pace of its bond purchases, and Fed officials endorsed the policy statement unanimously.

Underneath, though, the meeting included substantial disagreement over how the US central bank should proceed in setting monetary policy, at a time when the economy is improving but unemployment is still high.

That’s the message that emerged Wednesday as the Fed released minutes of the January meeting of its policy-setting Federal Open Market Committee.

A number of questions now hang in the air regarding monetary policy, and the meeting records showed signs of vigorous internal debate.

The issues include:

• Is it time to consider raising the Fed’s short-term interest rate? Some members of the policy committee think so, although most do not.

• How specific should the policy committee get in describing when an interest-rate hike might come? This communication question – not just the policy choice on rates – divides Fed officials.

• Should the Fed continue to scale back its monthly bond purchases at a steady pace? The bond-buying program, designed to stimulate the economy, declined by $10 billion at a December meeting and by the same amount at the January meeting. But the minutes suggest that some officials are closer than others to blinking (and putting the taper on hold) at signs of economic weakness.

Although the committee was unanimous in the decision to continue the bond-purchase taper, a couple of participants at the meeting were hesitant about that decision. And “a number of participants” were prepared to change course “if the economy deviated substantially from its expected path,” the minutes said.

The murkiness of Fed policy comes as Janet Yellen, who replaced outgoing Fed chief Ben Bernanke at the start of this month, is poised to chair her first policy meeting in March.

All this doesn’t mean Fed policy is suddenly a realm of vast uncertainty.

The stock market, for example, didn’t appear to budge Wednesday as investors digested the Fed’s 2 p.m. release. And forecasters say the Fed is still far from the point of actually trying to steer short-term interest rates upward.

“Those two Fed members who want to raise interest rates this year were particularly vocal at the last meeting, pushing for a rate hike by mid-year,” Paul Edelstein, director of financial economics at IHS Global Insight, writes in an analysis of the Fed minutes.

But, he says, many Fed members are wary of imposing standard policy formulas – such as a so-called Taylor rule that would call for a small boost in interest rates – in the current slow recovery.

Economists generally expect no hike in the Fed’s interest rate until sometime in 2015.

What may come soon, though, is some fresh thinking about how to communicate ahead of time about how an interest-rate decision will be reached.

The unemployment rate is approaching 6.5 percent, a figure the Fed has held out as a “threshold” for considering a rate hike.

“Participants agreed that ...  it would soon be appropriate for the Committee to change its forward guidance,” the minutes said.

“Some participants favored quantitative guidance along the lines of the existing thresholds, while others preferred a qualitative approach that would provide additional information regarding the factors that would guide the Committee’s policy decisions,” the meeting record added.

Either way, the rate decision hinges on whether inflation appears to be near a Fed target of 2 percent a year and whether the labor market is returning to health. Chair Yellen and her colleagues will look not just at the official unemployment rate but also at indicators such as how many people have been unemployed for more than half a year.