Fed policymakers worry about hiking rates too soon

Federal Reserve policymakers expressed concern last month that increasing interest rates too soon could pour cold water on the US economic recovery, and fretted over the impact of dropping “patient” from the central bank’s rate guidance.

The minutes from the Fed’s January 27-28 policy-setting meeting, released yesterday, show officials grappling to square solid US economic growth with the weakness in international markets as well as worrying about falling inflation expectations in the US.

Fed officials debated the impact that stubbornly low inflation measures were having on the central bank’s confidence in moving ahead with the rate hike plan, the minutes from the Federal Open Market Committee meeting showed.

Since early February, bond yields have shot higher, a move that showed investors were getting more comfortable with the expectation that the Fed’s initial rate hike would happen in June, on the back of strong economic growth and jobs data. Bond yields fell after the release of the minutes.

Even though Fed officials agreed that US economic growth was strengthening, the central bank continues to debate whether it can move ahead with raising rates with falling inflation expectations and global turmoil hanging over the country, the minutes showed.

“Several participants saw the continuing weakness of core inflation measures as a concern,” the minutes said, detailing the Fed’s internal debate over the conflicting signals sent by different measures of inflation expectations.

Though policymakers expect the recent bout of low US inflation to prove transitory, they also said the different measures of expectations “needed to be monitored closely” for signs the public or investors are losing faith in the Fed’s ability to reach its 2% inflation target.

The Fed repeated in January that it would be “patient” in deciding when to raise benchmark borrowing costs from zero and acknowledged a decline in certain inflation measures.

Fed Chair Janet Yellen said in December that being “patient” implies that the Fed will not raise rates at least for the next two meetings.