FOMC minutes: Some Fed members concerned with prolonged low interest rates

Low rates could discourage investments, depressing economic growth

The Federal Open Market Committee released its minutes today, showing that in September’s meeting there was division between members who wanted a rate hike and those who took a more cautious approach.

At the end of the meeting, Janet Yellen, Federal Reserve System chair of the Board of Governors, explained why the Fed chose not to raise rates.

“Our decision does not reflect a lack of confidence in the economy,” Yellen said.

She explained the Fed preferred to take a more cautious approach to see if current growth would continue.

The minutes of the meeting show that some Fed members pushed for raising interest rates, and even raised concerns about the effect of interest rates remaining low.

From the minutes:

With regard to recent financial developments, it was noted that regulatory changes and impending MMF reforms likely had led to an increase in certain short-term interest rates, but these developments were expected to have only a small effect on the borrowing costs of nonfinancial corporations and little adverse influence on overall financial market conditions. A few participants expressed concern that the protracted period of very low interest rates might be encouraging excessive borrowing and increased leverage in the nonfinancial corporate sector. Finally, one participant expressed the view that prolonged periods of low interest rates could encourage pension funds, endowments, and investors with fixed future payout obligations to save more, depressing economic growth and adding to downward pressure on the neutral real interest rate.

Curt Long, chief economist for the National Association of Federal Credit Unions, said that the minutes show an increased chance of a rate hike in December.

“The minutes from the FOMC’s September meeting continue to show stark divisions among committee members,” Long said. “With three dissenting voters, there is clearly a faction that wants to commence with rate hikes immediately.”

“Even within the group that voted to maintain rates where they are, there is apparently one segment which sees a rate hike as imminent, and another which prefers a more cautious approach,” he said. “The former likely provided the impetus to add a sentence to the Fed’s release stating that the case for raising rates had strengthened. Another two months of decent performance from the labor market should be enough to prompt a rate hike in December."

NAFCU isn’t the only one who thinks a rate hike is on the way.

“We doubt the Fed will hike rates at the November meeting, not least because it falls just before the presidential election…we then expect the Fed to raise the fed funds rate in December,” Capital Economics Chief Economist Paul Ashworth said.

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