Economy

December FOMC Minutes Reveal Worries Over Low Inflation

Paul Ausick

Published: January 6, 2016 2:27 pm

Last Updated: January 13, 2020 3:22 pm

The Federal Reserve on Wednesday afternoon released the minutes of its December 2015 meeting of its Federal Open Market Committee (FOMC). That’s the one where the Fed raised the policy rate from a range of 0 to 0.25% to a new range of 0.25% to 0.5%. The vote to raise the target range, as previously noted, was unanimous.

Following the October meeting, the FOMC concluded that the economy was expanding at a “moderate pace” and they saw no reason to change that appraisal in December:

Although net exports remained soft, consumer and business spending remained solid, and the housing sector improved further. Overall, taking into account domestic and foreign developments, members saw the risks to the outlook for both economic activity and the labor market as balanced, and they expected that, with gradual adjustments in the stance of monetary policy, economic activity would most likely continue to expand at a moderate pace.

Job growth was good and inflation was not an issue:

Inflation continued to run below the Committee’s longer-run objective, held down in part by the effects of declines in energy and non-energy import prices. Market-based measures of inflation compensation remained low; some survey-based measures of longerterm inflation expectations had edged down.

But there were also some concerns on the inflation front:

[F]or some members, the risks attending their inflation forecasts remained considerable. Among those risks was the possibility that additional downward shocks to prices of oil and other commodities or a sustained rise in the exchange value of the dollar could delay or diminish the expected upturn in inflation. A couple also worried that a further strengthening of the labor market might not prove sufficient to offset the downward pressures from global disinflationary forces. And several expressed unease with indications that inflation expectations may have moved down slightly. In view of these risks and the shortfall of inflation from 2 percent, members expressed their intention to carefully monitor actual and expected progress toward the Committee’s inflation goal.

And as an answer to critics who think the FOMC moved too soon to raise rates:

Members agreed that the post-meeting statement should report that the Committee’s decision reflected both the economic outlook and the time it takes for policy actions to affect future economic outcomes. If the Committee waited to begin removing accommodation until it was closer to achieving its dual-mandate objectives, it might need to tighten policy abruptly, which could risk disrupting economic activity.

PCE inflation is not expected to reach an annual average of 2% until 2018 although the Fed expects inflation to range between 1.8% and 2% in 2017. The Fed funds rate is projected at 0.4% for 2015, 1.4% for 2016, 2.4% for 2017, and 3.3% for 2018. Over the longer run the Fed projects inflation of 3.5%, ranging as high as 3.9% in 2018.