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FOMC Minutes, Unemployment and Future Interest Rates

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The Fed released the January FOMC meeting minutes yesterday. One thing I found interesting was the objection raised by Thomas Hoenig, president of the Federal Reserve Bank of Kansas City. Hoenig wanted to replace the wording of expectations that the federal funds rate would remain "exceptionally low for an extended period" to "low for some time". The details of his reasoning are described in the minutes:

Mr. Hoenig dissented because he believed it was no longer advisable to indicate that economic and financial conditions were likely to "warrant exceptionally low levels of the federal funds rate for an extended period." In recent months, economic and financial conditions improved steadily, and Mr. Hoenig was concerned that, under these improving conditions, maintaining short-term interest rates near zero for an extended period of time would lay the groundwork for future financial imbalances and risk an increase in inflation expectations. Accordingly, Mr. Hoenig believed that it would be more appropriate for the Committee to express an expectation that the federal funds rate would be low for some time--rather than exceptionally low for an extended period. Such a change in communication would provide the Committee flexibility to begin raising rates modestly. He further believed that moving to a modestly higher federal funds rate soon would lower the risks of longer-run imbalances and an increase in long-run inflation expectations, while continuing to provide needed support to the economic recovery.

This seems quite reasonable to me. Unfortunately, Hoenig was the only one of the committee members to vote against the policy action. The other members may be more concerned that higher rates will hurt the economic recovery which is still fragile as unemployment remains high. High unemployment is not expected to improve much in the near term. From the minutes:

A moderate pace of expansion would imply slow improvement in the labor market this year, with unemployment declining only gradually.

News this morning on unemployment didn't ease concerns. Bloomberg reported:

The number of Americans filing first-time claims for unemployment insurance unexpectedly increased last week, pointing to an uneven recovery in the labor market.

The CalculatedRisk Blog has shown how past federal funds rate hikes only occurred after several months of declining unemployment. So I wouldn't expect interest rate hikes anytime soon.



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Comments
Comment #1 by Anonymous posted on
Anonymous
feds raise rates by 25 basis point!!!

http://finance.yahoo.com/news/Fed-raises-discount-rate-to-rb-1185528021.html?x=0&sec=topStories&pos=main&asset=&ccode=

 

I guess 16.8% annual wholesale inflation is scary to Ben and the gang!!

4