Interest rates in the US – and in many other countries – have been close to zero since the financial crisis hit in 2008 and triggered a global recession.
In recent months, the Federal Reserve has stated that the US’s central bankers intend to be “patient” and wait for further signs that the US economy is firmly on track before raising rates. Words matter at the Fed. Every utterance and release it makes is closely watched by Wall Street and investors around the world.
Rates must go up eventually. And months of good news from the US labour market and other positive economic signs have convinced some that the Fed’s patience should be wearing thin. Some Fed officials at their last meeting in January believed “it might be appropriate to begin policy firming in the near term”, according to minutes released on Wednesday.
Many, however, were concerned about “dropping the ‘patient’ language in the statement, whenever that might occur, as risking a shift in market expectations for the beginning of policy firming toward an unduly narrow range of dates. As a result, some expressed the concern that financial markets might overreact, resulting in undesirably tight financial conditions.”
Both sides of the central bank agreed not to move either way on interest rates for now; the Fed’s rates remained unchanged, at close to zero.
The split over language and how markets may react to the Fed’s statement has led officials to rethink how they may communicate in the future. With investors parsing every word that comes out of each meeting, some would rather the Fed said less.
“A number of participants noted that while forward guidance had been a very useful tool under the extraordinary conditions of recent years, as the start of normalization approaches, there would be limits to the specificity that the committee could provide about its timing,” the Fed minutes state. “Looking ahead, some participants highlighted the potential benefits of streamlining the committee’s post-meeting statement once normalization has begun.”
That decision may well not sit well with the Fed’s Republican critics. Senator Rand Paul, a likely presidential candidate, is pushing a bill to “audit” Fed policy – giving the government greater oversight of the independent central bank. Rand has been a long-time critic of the Fed, calling it unaccountable and irresponsible.
Paul’s campaign has angered Fed officials. On Tuesday Charles Plosser, outgoing president of the Philadelphia Federal Reserve, denounced the proposal as “political interference” and “an attempt to reduce the independence of the central bank through the threat of a political action in real time”.
“History is replete with examples of what happens when central banks are not independent or become agents for a nation’s fiscal policy,” he said.
“The consequences – higher inflation, currency crises and economic instability – are not good,” Plosser said. “This is why so many countries have structured their central banks with a great deal of independence from political interference.”
This article was written by Dominic Rushe, for theguardian.com on Wednesday 18th February 2015 20.44 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010