U.S. stocks soar after Fed minutes

The Chicago Federal Reserve Bank / megan k. rauch / MEDILL
The Federal Reserve Bank of Chicago / Megan K. Rauch / MEDILL

 

by Megan K. Rauch

Stock prices surged Wednesday afternoon, after the release of the latest minutes from the Federal Reserve suggested interest rates might remain near zero farther into the future.

The minutes make it clear that the Federal Open Market Committee, which controls interest rates, is increasingly wary that issues abroad could impact the U.S. economy going forward.  Disappointing economic conditions in Europe and Asia and the growing strength of the U.S. dollar on the economy were among the biggest concerns for the Fed.

At the September meeting, the FOMC affirmed its March decision to not raise interest rates zero for a “considerable time,” even as the committee noted that the economy is improving at a moderate pace.

The Fed still plans to wind down its bond-buying program, an economic stimulus effort known as Quantitative Easing, by the end of this month.  The question investors are focused on is how far into the future the Fed will actually begin raising interest.  The tenor of Wednesday’s minutes seemed to indicate that hikes aren’t imminent, despite a recent spate of strong economic reports in the U.S.

That’s because of concerns over softening economies overseas.  “Some participants expressed concern that the persistent shortfall of economic growth and inflation in the Euro area could lead to a further appreciation of the dollar and have adverse effects on the U.S. external sector. Several participants added that slower economic growth in China or Japan or unanticipated events in the Middle East or Ukraine might pose a similar risk,” the September minutes said.

Other concerns expressed in the minutes were that the unemployment rate has remained relatively stagnant and that inflation remains below the Fed’s 2 percent goal.

Federal Reserve policymakers’ opinions remain divided about when interest rates should be raised.  The two camps disagree about whether the Fed should be moving to hold down possible inflation by raising rates, in a process known as “liftoff,” or whether it should continue to support economic growth by keeping rates low.

In a speech Tuesday, New York Federal Reserve Bank President William C. Dudley expressed support for raising the interest rates in 2015. “The consensus view is that liftoff will take place around the middle of next year.  That seems like a reasonable view to me,” said he said.

Dudley also said that appreciation on the U.S. dollar would take some of the pressure off the Fed to raise inflation and indicates increasing confidence in U.S. economic growth prospects.

Chicago Fed President Charles Evans disagrees. “I am very uncomfortable with calls to raise our policy rate sooner than later. I favor delaying liftoff until I am more certain that we have sufficient momentum in place toward our policy goals,” he said in a speech Wednesday in Wisconsin.