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December Rate Hike Came Amid Uncertainties
Thursday, January 7, 2016 6:35 AM

The Federal Open Market Committee’s (FOMC) decision to raise interest rates last month was unanimous; but the newly released minutes from the meeting reveal more consternation than the undivided vote may have implied (MarketWatch Jan 6).

“Some members said that their decision to raise the target range was a close call, particularly given the uncertainty about inflation dynamics, and emphasized the need to monitor the progress of inflation closely,” the minutes said.

The FOMC voted for a rate hike—bumping the federal funds rate up to 0.25 percent to 0.5 percent from 0 percent to 0.25 percent—for the first time since the financial crisis at its meeting in December.

Members cited strength in the labor market and a reasonable confidence that inflation would eventually ascend to its 2 percent target as reasons for its decision. But not every voting member felt strongly that inflation would rise. In fact, a number of the central bankers said they believed that the chances inflation would continue to flat line “remained considerable.”

Other concerns included that:

  • Continued bottomed-out oil prices could delay the expected increase in inflation;
  • Additional strength in the labor market could be offset by global “disinflationary forces"; and
  • Consumer and business expectations about inflation continue to drop.

“Although almost all still expected that the downward pressure on inflation from energy and commodity prices would be transitory, many viewed the persistent weakness in those prices as adding uncertainty or posing important downside risks to the inflation outlook,” the minutes said (MarketWatch).