From
Send to

Fed worries about international risks to U.S. economy

Jan. 8, 2015 - 21:22 By Korea Herald
WASHINGTON (AFP) ― The Federal Reserve worried about foreign risks to the U.S. economy but could raise interest rates despite weaker-than-desired inflation, according to the minutes of the last meeting published Wednesday.

“Many participants regarded the international situation as an important source of downside risks to domestic real activity and employment,” said the minutes of the Dec. 16-17 meeting of the Federal Open Market Committee.

The potential for weaker U.S. economic growth would rise “particularly if declines in oil prices and the persistence of weak economic growth abroad had a substantial negative effect on global financial markets,” the minutes said, “or if foreign policy responses were insufficient.”

The outlook for growth in the eurozone, Japan and China has dimmed and slumping oil prices are battering the economies of Russia, Venezuela and other oil-exporting countries.

The final 2014 meeting of the Fed’s policy arm came amid a plunge in oil prices since June that has further deepened, more than halving the value of crude oil to below $50 a barrel currently.

The sharp fall in oil has roiled financial markets, especially in the first trading days of the year, as investors worry about weaker demand in a slowing economy and a global oil supply glut.

But the FOMC, in its December discussion of when to start raising the federal funds rate, pegged near zero for six years to support the recovery from deep recession, saw a boon from lower oil prices.

A few participants said the effect was likely to be positive on overseas employment and economic growth.

For the U.S. economy, several participants expected slower economic growth abroad to curb the U.S. economy, mainly through lower net exports.

“But the net effect of lower oil prices on U.S. economic activity was anticipated to be positive.”

The policymakers saw “broad-based improvement” in the labor market since their Oct. 28-29 meeting, with solid gains in job growth, a small reduction in the unemployment rate and increased hiring.

But despite the labor gains and the economy growing at a “moderate” pace, “most participants saw no clear evidence of a broad-based acceleration in wages.”

Inflation running well below the Fed’s longer-term 2 percent target was expected to rise gradually to the comfort zone as officials expected the labor market would continue to improve and the “transitory” effects of lower oil prices and other factors would fade.

“The risks to the outlook for economic activity and the labor market were seen as nearly balanced.”

The policymakers indicated that the Fed may raise rates even though inflation remained below target.

“With lower energy prices and the stronger dollar likely to keep inflation below target for some time, it was noted that the Committee might begin normalization at a time when core inflation was near current levels, although in that circumstance participants would want to be reasonably confident that inflation will move back toward 2 percent over time,” the minutes said.