Fed's Powell Counseled Caution on Raising Rates in 2014 Meetings -- Update

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01/10/2020 | 11:43 pm

By Nick Timiraos

In December 2014, Federal Reserve officials were debating how and when to signal plans to raise interest rates after six years of holding them near zero following the financial crisis.

Current Fed Chairman Jerome Powell was then in his third year as a governor when he warned against pulling the trigger prematurely, given the lack of tools to stimulate economic growth should the move backfire.

"The very difficult mistake to recover from would be to go...and then suddenly things turn bad for some reason that will look very obvious in hindsight," said Mr. Powell that December. "Now, we're sitting around this table talking about restarting [crisis-era stimulus programs] and suffering from immense criticism that will be very hard to defend."

Mr. Powell's cautious approach was evident in 2,007 pages of transcripts released Friday of nine closed-door Fed meetings from 2014.

The records revealed the extent of officials' debate over when to raise rates, with deliberations turning on questions that have animated their policy discussions to the present day. Those questions include how low the unemployment rate can fall before pushing up wages and prices.

The Fed ended up leaving its benchmark interest rate unchanged through 2014. In the next year, then-Fed Chairwoman Janet Yellen persuaded her colleagues to delay raising rates amid a global growth swoon, and they approved just one increase each at the end of 2015 and 2016.

Steadier growth and lower unemployment prompted the Fed to raise rates three times in 2017 under Ms. Yellen and four times in 2018 under Mr. Powell.

He reversed course last year and cut the benchmark rate three times, to a range between 1.5% and 1.75%, as slowing global growth fueled worries about a recession.

Last year, Mr. Powell set aside the framework that had guided the central bank to lift interest rates and head off higher inflation. Although unemployment has stayed below the level officials estimate to be consistent with stable prices, inflation retreated below the Fed's 2% target, defying central bank projections. Prior increases have also moved interest rates closer than they were a few years ago to an estimated "neutral" level that neither spurs nor slows growth.

The transcripts also offered new insight into the thinking of several key players still on the policy-making scene, including Mr. Powell.

Despite strong U.S. economic performance in the second half of the year, Mr. Powell said at the December 2014 meeting he was keeping a close eye on the potential for weakness abroad washing ashore.

"Perhaps I'm just constitutionally more focused on avoiding downside risks, or it may be that the risks to the downside actually are greater and represent more difficult challenges for policy," he said.

Most officials, including Mr. Powell, thought the Fed would be in a position to raise rates by the middle of 2015, and they debated changes to their policy statement in December to set the table for such an increase.

Ms. Yellen faced three dissents at that meeting, however, with two from reserve bank presidents who favored a more urgent signaling of rate increases and a third who feared the central bank was in too big a rush to withdraw economic stimulus.

One camp of officials argued that steady declines in unemployment suggested the economy was moving closer to a state in which inflation pressures build as firms compete for a dwindling supply of labor.

Economists call this cutoff point a non-accelerating inflation rate of unemployment, or Nairu. Fed officials use this concept to estimate a "natural rate" of unemployment, or the level at which inflation is stable in the longer run, to gauge the appropriate level of interest rates.

Cleveland Fed President Loretta Mester said she was prepared to begin raising rates within three months of the December meeting and warned against "underestimating the costs of moving too slowly."

"Our policy is badly out of position compared with historic norms," said St. Louis Fed President James Bullard.

But a few others worried the central bank was overconfident in its projection that inflation would rise to its 2% target, especially since they were steadily revising lower their estimates of how far unemployment could fall before pushing up prices.

At the December meeting, Chicago Fed President Charles Evans said his forecast wouldn't see inflation rise to 2% for another four years, in 2018, despite his own projection of a later starting point of March 2016 for lifting rates.

Having inflation below the target for so long is "highly unsatisfactory, " said Mr. Evans at the meeting. The Fed's baseline outlook "is fraught with risks that inflation will stall out before we get to 2%," he said.

Likewise, Boston Fed President Eric Rosengren pointed to uncomfortably low levels of market-based inflation expectations given his colleagues' preparations to begin raising interest rates. He pointed to the challenges facing policy makers in Europe of boosting growth and inflation.

"We are still in danger of undermining our credibility on our inflation target," he said. "The European quandary highlights why we should not take this risk lightly."

Inflation returned to the Fed's 2% goal for most of 2018, but officials are now engaged in a review of their policy-making framework to prevent inflation expectations from dropping to levels that could make it harder for the Fed to boost growth and counteract downturns.

Write to Nick Timiraos at nick.timiraos@wsj.com

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