Many Fed officials want to see stronger economy before rate hike

Many Federal Reserve officials are concerned that hiking rates too quickly could put a damper on the ongoing economic recovery.

Minutes from the Fed’s January policy-setting meeting released Wednesday revealed an ongoing divide between the Fed when it comes to when it should increase interest rates for the first time since the financial collapse.

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The central bank has pumped an unprecedented amount of stimulus into the economy since the crash, but now the central bank is embroiled in a debate about when, with the economy taking off on its own, the Fed should begin tightening policy.

Wednesday’s minutes indicate there is a significant chunk of the Fed that is still not convinced the economy is healthy enough to weather an interest rate hike. Ever since the Fed wrapped up its stimulus in 2014, the central bank has been closely watched for indications of when it might be ready to finally raise rates again.

Stocks spiked after Wednesday’s minutes were released, on the indication that they revealed a more patient bloc of Fed voters than once assumed.

On one side, “many” Fed participants said at the January meeting that they were inclined to err on the side of keeping rates near zero for longer. They argued that a premature rate hike could upend the economic recovery, doing damage that could force the Fed to have to lower rates yet again to provide a boost.

“Many participants observed that a premature increase in rates might damp the apparent solid recovery in real activity and labor market conditions, undermining progress toward the Committee's objectives,” the minutes stated.

A number of Fed officials said they needed to see more from the economy in terms of job gains and overall growth before they were prepared to begin brining rates back up.

In fact, one participant went so far as to argue the Fed should be doing more at the moment, noting that inflation remains well under control.

In the other corner, the minutes show that “some” on the Fed are prepared to raise rates sooner. They argued that if the Fed waits too long, it could be encouraging inflation to rear its head. Or, they argued, keeping rates low for too long, or raising them too quickly after waiting, could lead to financial instability.

Beyond what to do about rates, Fed officials also debated what they would be looking for in the economy to inform their decision. Several officials said they wanted to see healthier gains in wages, which would suggest that the labor market had tightened enough to produce wage pressure and as a beginning sign that inflation could be on the way.

Others dismissed wage gains as a signifier of impending inflation.

And the Fed also has to figure out how to properly communicate its plans to the markets without causing an overreaction. Recent Fed statements have indicated the central bank is prepared to be “patient” with its interest rate moves. But minutes show officials are concerned that when that language is finally scrapped in future statements, it could be read by the market as a more immediate shift than they intended. As such, they also discussed ways to emphasize the Fed’s planned course, by emphasizing that all moves are dependent on incoming economic data, for example.