Do Wednesday's Fed Minutes Signal an Interest Rate Delay?

01/08/2015 9:11 am EST


Jim Jubak

Founder and Editor,

The Fed minutes raise the possibility that expectations for a first interest rate increase in mid-2015 might be too early, and MoneyShow's Jim Jubak thinks the implications raise questions and make the Fed picture less certain than it looks.

Was there a surprise in the minutes released Wednesday from the Federal Reserve's December 16-17 meeting?

Well, kind of. Maybe not a surprise, actually, so much as an intimation of the possibility of a future surprise.

The minutes raise the possibility that expectations that a first interest rate increase from the Federal Reserve in mid-2015 might be too early. The emphasis in the minutes on a need to see evidence that inflation is firmly set near the target of 2% definitely raises the possibility that the Fed will wait and see. (According to the Fed's inflation gauge, the personal consumption expenditures price index, inflation climbed at a 1.2% annual rate in the period that ended in November. The core inflation rate, which is without food and energy prices, climbed 1.4%.)

In the minutes, the Fed characterized the current drop in oil prices as transitory. But with energy analysts and oil traders suggesting that oil prices won't stabilize until mid-2015, that transitory drop could mean the Fed won't see inflation solidly near 2% until sometime after the middle of the year. That's especially likely if you consider that energy prices at the consumer level lag crude oil prices by some months. Even if crude oil prices stop falling by mid-2015, prices for things like gasoline and jet fuel are likely to continue to decline for a while.

According to the minutes, several Fed governors raised the worry that the Fed might be sending too strong a signal of an April-to-June schedule for the first interest rate increase. Reading between the lines, I come away with a sense that these governors think there's a danger that the market will price in a mid-2015 year increase and then show dangerous volatility if the Fed doesn't meet that schedule.

Look for evidence that this view might be gaining strength in the statement and press conference after the Fed's next meeting on January 27-28. If the Fed were starting to consider the possibility that inflation will remain significantly below 2% or remain significantly unpredictable by mid-2015, I'd expect to see a renewed emphasis on the data dependent nature of a decision on interest rates. That would be a return to past Fed pronouncements that said a decision on ending asset purchases-which finally came in October-was data dependent. Of course, then the data a decision depended on was on jobs and unemployment. And now it's on inflation.

The implications of a later than expected first interest rate increase are interesting to contemplate. Would that mean the US dollar is too strong? Would that mean US growth might pick up more than expected? Would that mean another boost for US financial assets?

Stay tuned. The Fed picture may be less certain than it looks.

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