Recent FOMC minutes show conflict on low-rates pledge

by MPA20 Nov 2014
The big news that came from last month's Federal Open Market Committee meeting was the end of its two-year, bond-buying program, which increased anxieties about where rates are headed. And now, according to the minutes released Wednesday, the Federal Reserve is conflicted about its pledge to keep interest rates near zero "for a considerable time."

Some Fed members favored eliminating the low-rates pledge, while others worried that such a move could prompt financial markets to push rates up prematurely. At the Oct. 28-29 meeting, Fed officials agreed to keep its short-term interest rate at a record low. Officials said that the timing of an interest rate hike will depend on how close the economy is to achieving the Fed's goals for maximum employment and inflation running, at an annual rate of 2%.

"If incoming information indicates faster progress toward the Committee's employment and inflation objectives than they now expect, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated," according to the minutes. "Conversely, if progress proves slower than expected, increases in the target range are likely to occur later than currently anticipated."

The minutes also showed all but one policymaker backed the Fed's decision to end quantitative easing, which has held down long-term interest rates, at the end of October. The dissenting policymaker wasn't named.

The Fed’s exit from the Treasury market could have a bigger effect if the economy heats up, economist John Lonski of Moody's Investor Services told USA Today last month. "It will heighten anxiety about the first rate hike," pushing up yields more quickly. Mortgages rates could raise about 10 basis points, he added. The Fed owns 38% of outstanding mortgage securities versus 22% of outstanding Treasuries.

Click here to read the minutes from the Fed's October 28-29 meeting.
 

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