Minutes from the last US Federal Reserve meeting have revealed a more cautious tone among policymakers, with participants acknowledging tightening global financial conditions could amplify downside risks.
The documents from the Federal Open Market Committee (FOMC) meeting on January 26-27 highlighted concerns that developments in commodity and financial markets “as well as the possibility of a significant weakening of some foreign economies had the potential to further restrain domestic economic activity”.
In considering the balance of risk to the medium-term economic outlook, most attendees agreed it was difficult to judge whether the outlook for inflation and economic growth had changed materially. But they did state that uncertainty had increased as a result of recent financial and economic developments.
However, the minutes added: “several participants noted that monetary policy was less well positioned to respond effectively to shocks that reduce inflation or real activity than to upside shocks, and that waiting for additional information regarding the underlying strength of economic activity and prospects for inflation before taking the next step to reduce policy accommodation would be prudent.”
The path of inflation remained a key issue for many of the policymakers with some pointing to measures that could suggest inflation was declining, while others were more optimistic that inflation would increase gradually once energy prices and the prices of non-energy imports stabilise.
As a result, the meeting participants “judged that the overall implication of these developments for the outlook for domestic economic activity was unclear, but they agreed that uncertainty had increased, and many saw these developments as increasing the downside risks to the outlook”.
The Fed implemented its first interest rate rise since 2006 last December, with the central bank continuing to emphasise that any future rate rises will be gradual and data dependent.
