BUSINESS

Fed expressed 'increased uncertainty' about U.S. economy as markets tumbled

As financial markets tumbled to start the year, Federal Reserve policymakers expressed "increased uncertainty" about the effects on the U.S. economy but decided it was premature to significantly alter their forecast for moderate growth in 2016, according to an account of their most recent meeting released Wednesday.

Still, with the economic outlook unclear, members of the Federal Open Market Committee voted unanimously at the Jan. 26-27 meeting to hold the central bank's key short-term interest rate steady at between 0.25% and 0.5%.

No hike had been expected after the Fed raised the rate in December for the first time in nearly a decade.

But prospects for inching the rate up again by 0.25 of a percentage point in March were unclear after many policymakers said last month that risks to the U.S. economy had increased because of global financial and economic developments, according to minutes released with the normal three-week delay.

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Several of the committee members said last month that it "would be prudent" to wait for additional information about the strength of the economy and prospects for an increase in extremely low inflation before deciding on the next hike in the so-called federal funds rate, the minutes said.

The Fed officials stressed that it was important to closely monitor what was going on in the global economy and major worldwide financial markets before making such a decision.

The concerns raised at the January meeting echoed comments last week by Fed Chairwoman Janet L. Yellen, who told lawmakers that the central bank could delay future rate hikes.

"We've not yet seen a sharp drop-off in growth either globally or in the United States, but we certainly recognize that global market developments bear close watching," Yellen told the House Financial Services Committee on Feb. 10.

In their most recent interest rate forecast, a majority of the Fed's 17 policymakers projected in December that the central bank would enact four 0.25 percentage-point increases this year.

But Fed staffers at the January meeting noted that "turbulence in global financial markets evidently led investors to expect a more gradual increase" in the interest rate.

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Inflation has been running well below the Fed's 2% annual target and an increase in the short-term interest rate would not help reverse that trend. Most policymakers said last month that they expected inflation to start gradually increasing once falling energy prices stabilized.

But Fed officials agreed that further declines in energy prices last month and the rising value of the dollar was "likely to hold down inflation for longer than previously anticipated."

That led "a few participants" to say that "direct evidence that inflation was rising toward 2% would be an important element" in deciding on future interest rate moves, the minutes said. 

jim.puzzanghera@latimes.com

Follow @JimPuzzanghera on Twitter

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