Minutes from the Federal Reserve’s monetary policy setting Federal Open Market Committee (FOMC) meeting January 27-28 reveal an as yet unsettled discussion regarding the timing of the first increase in the federal funds rate, but the weight of the conflicting views appears to be shifting toward a liftoff later than the current expectation of mid-2015.
Declining energy prices were viewed to be a net benefit for economic growth and labor market improvement, both at home and abroad, but below target inflation and the expectation of its persistence in the near term, combined with the litany of international and global factors that could undermine the current recovery to tilt the momentum away from an earlier liftoff. Slowing economic growth in China and other countries, global disinflationary pressure, uncertainty related to Greek debt, as well as tensions in the Middle East and Ukraine were cited as possible sources of perturbations that could generate a setback for the US recovery, or at least impede a return to healthier inflation.
In the end it may be the inability to communicate a rationale for beginning policy normalization in an environment of lingering below target inflation that dooms even a June meeting liftoff. Policy actions being data dependent has been a guiding principle of the committee’s exit strategy. Expectations of continued downward pressure on prices from energy in the near term are inconsistent with a data-driven picture of recovering inflation rates in coming months, suggesting that the committee isn’t going to see what it wants to see in time to raise rates in June.
Look for liftoff in the second half of 2015 rather than the middle of the year that is the current consensus expectation.