Minutes released from the late January FOMC meeting revealed concern amongst several members of the committee over the need to consider raising the fed funds rate of interest. Currently, the market believes the Fed to be good to its word and that the short rate of interest will remain welded to the spot at 0.25%. The Fed last raised its benchmark rate of interest in July 2006. The discussion rose out of the recent move lower for the unemployment rate, which is closing in on the FOMC’s 6.5% threshold. When the rate crosses the border, the FOMC says it would be appropriate “to change its forward guidance in order to provide information regarding the federal funds rate”.
While some favored numeric guidance along existing lines to help the public understand Fed policy, other members preferred a qualitative approach providing additional information that would guide the committee’s decisions. But in a sign that the FOMC remains nonplussed regarding the need to act any time soon on the level of the short-term interest rate, some members suggested that risks to financial instability should feature “explicitly” in the decision-making guide once the threshold is crossed. Others felt that forward guidance should offer greater emphasis to the committee’s willingness to keep the benchmark rate static in the event that inflation remained persistently below its 2% objective. The minutes noted other proposals that would rely on the quarterly Summary of Economic Projections as a communications device to lean against undesired changes in financial conditions.
The minutes revealed itchy fingers regarding the desire to raise rates soon. One participant said that the real equilibrium rate had shifted higher, while two members noted that standard policy rules suggested that the fed funds rate should be lifted off its lower bound before the middle of this year. Others countered such arguments by disavowing such standard policy rules by claiming they were not appropriate in the current environment or because the equilibrium rate of interest was likely restrained by a variety of effects stemming from the financial crisis.
And so despite the headlines flagging the disagreement on timing of changes to the fed funds rate, it is little surprise that Treasury note yields have barely budged following the release of the January FOMC minutes.