The Federal Reserve postponed an interest rate hike last month as it worried about a global slowdown led by China, the strong dollar and listless US inflation, a Fed report showed Thursday.
Policymakers at the September 16-17 meeting of the Federal Open Market Committee, mulling an increase in the zero-level federal funds rate, took a cautious approach after a severe bout of financial turmoil unsettled the outlook for the US economy.
“Recent global and financial market developments might restrain economic activity somewhat as a result of the higher level of the dollar and possible effects of slower economic growth in China and in a number of emerging market and commodity producing economies,” the minutes said.
Still, “most participants continued to anticipate that, based on their assessment of current economic conditions and their outlook for economic activity, the labor market, and inflation, the conditions for policy firming had been met or would likely be met by the end of the year,” the minutes said.
With one dissent, the FOMC voted to leave the benchmark interest rate between zero and 0.25 percent, where it has been since December 2008 to support the economy through the worst recession since the 1930s and its recovery.
Although the US economy was considered to be growing moderately and the labor market was nearing full employment, with unemployment at 5.1 percent, some Fed policymakers appeared less optimistic that inflation would move toward the longer-term 2.0 percent target.
Committee members stuck by their view that low inflation was transitory, due in part to low energy prices that would eventually rise.
But some expressed worries about persistently weak price pressures that were enduring more than six years after the recession ended, even as the economy continued to expand, contrary to the experience of previous recoveries.
“Some participants judged that the downside risks to the outlook for economic growth and inflation had increased,” the minutes said.
Partly because of the risks to the outlook for economic activity and inflation, the committee decided that it was “prudent to wait” for additional information to confirm that the economic outlook was not getting worse and that inflation was heading toward the central bank target.
Given the market turmoil preceding the FOMC meeting, the decision to stand pat on rates was not a surprise for most analysts. And since the meeting, Fed Chair Janet Yellen has said the hike likely remained on track by year-end.
But an unexpectedly weak US September jobs report last week has clouded the liftoff prospects. The market’s view on the probability of a rate hike from the October 27-28 FOMC meeting was five percent after the minutes were released Thursday, compared with 38 percent for a December 16 hike, according to CME Group data.
Harm Bandholz of UniCredit Economics said the Fed would likely make its rate hike in December as domestic demand has continued to “power ahead” despite third-quarter growth challenges, including weak global trade.
“We also think that the two remaining employment reports this year will paint again a more positive picture, and would not be surprised to see the unemployment rate to have fallen below 5.0 percent by December.”