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Fed officials debated hiking rates into restrictive territory

Bloomberg logoBloomberg 10/17/2018 Christopher Condon

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Federal Reserve officials stepped deeper into a debate over how high to push interest rates, with a majority appearing to favor an eventual and temporary move above the level they deem neutral for the economy in the long run.

“A few participants expected that policy would need to become modestly restrictive for a time and a number judged that it would be necessary to temporarily raise the federal funds rate above their assessments of its longer-run level,” according to minutes of the Federal Open Market Committee’s Sept. 25- 26 meeting released Wednesday in Washington.

In their most recent projections, officials estimated that long-run neutral level -- where policy is neither stoking nor slowing the economy -- to be about 3 percent.

A “couple” of FOMC members argued against adopting a restrictive policy “in the absence of clear signs of an overheating economy and rising inflation,” according to the minutes.

The committee was otherwise in broad agreement over continuing on the current, gradual path of rate increases. The record showed “all participants” backed the Sept. 26 quarter- percentage point hike to a range of 2 percent to 2.25 percent.

Balance Risks

The release of the minutes comes three weeks after central bankers signaled their intention to hike again before year end. Chairman Jerome Powell has said he’s trying to balance the risks of allowing the economy to overheat by moving too slowly, and smothering the second longest economic expansion on record by hiking too quickly.

The Fed’s tightening has drawn criticism from President Donald Trump, who blamed it for the stock market decline last week. The minutes revealed no discussion among policy makers of the president’s remarks and no sign they had influenced their outlook for rates.

“Participants generally anticipated that further gradual increases in the target range for the federal funds rate would most likely be consistent with a sustained economic expansion, strong labor market conditions and inflation near 2 percent over the medium term,” according to the minutes.

The Fed's September Dot Plot© Bloomberg The Fed's September Dot Plot

Confidence appeared to be growing among officials that inflation would remain near their 2 percent target. Recent data on consumer prices was “consistent with their expectation that inflation was on a trajectory to achieve the committee’s symmetric 2 percent objective on a sustained basis,” the minutes said.

After falling short of that target for most of the past six years, the Fed’s preferred measure of inflation has now met or exceeded 2 percent for six straight months.

The minutes repeated an explanation offered by Powell at his post-meeting press conference for why their statement should drop the long-standing description of monetary policy as “accommodative.”

“Waiting until the target range for the federal funds rate had been increased further to remove the characterization of the policy stance as ‘accommodative’ could convey a false sense of precision in light of the considerable uncertainty surrounding all estimates of the neutral federal funds rate,” the minutes said.

The record showed Fed officials again held a lengthy discussion over the effects on the economy of ongoing trade disputes. A “number” of central bankers reported that business contacts had foregone production and investment opportunities because of uncertainty over trade policy. They also reported that some firms were attempting to diversify their import and export options for the same reasons.

Regarding issues of financial stability, some officials expressed concern about growth in and relaxed standards for leveraged loans as “reasons to remain mindful of vulnerabilities and possible risks to financial stability.”

Powell and some of his colleagues have noted that the greater risk associated with overheating the economy may come through financial-market excesses rather than inflation.

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