Minutes of the Fed's Oct. 28-29 meeting released on Wednesday showed that Fed officials grappled with a number of developments, from sharp moves in U.S. stock prices to increased signs of weakness in such key regions as Europe and Asia. They also expressed concern that inflation, which has been running below the Fed's target of 2 per cent, could drift lower because of falling energy prices and a strengthening U.S. dollar.
A number of Fed officials noted that economic growth might be slower over the medium term than currently expected if foreign economic conditions or financial markets deteriorated significantly, the minutes said. But the officials also expressed confidence that the U.S. economy was on solid footing and expected to keep improving.
The minutes cited the "somewhat weaker economic outlook and increased downsides risks in Europe, China and Japan." But it said that Fed officials believed the impact would likely be "quite limited" on the U.S. economy, in part because they expected that the slowdown in overseas demand would likely be less severe than initially feared.
Wall Street staged a big rally after release of the September meeting minutes as investors assumed that the Fed would delay a rate hike because of concerns about weakness overseas. However, the release of the October minutes had little market impact. Economists said the comments did not alter their expectation that the first rate hike would probably take place around June of next year.
"The timing will depend on the data ... nothing very definitive," said Jim O'Sullivan, chief U.S. economist at High Frequency Economics.
The minutes showed that for a second meeting there was a debate over the language outlining the pace of interest rate hikes. Board members debated whether or not to remove language Fed officials have used since the spring that they expected to keep a key short-term interest rate low for a "considerable time" after halting monthly bond purchases.
The Fed decided to keep the "considerable time" wording because officials worried that its removal could be misinterpreted and cause markets to drive interest rates higher and harm the recovery.
Private economists do not expect the Fed to begin raising interest rates until mid-2015 and nothing revealed by the discussion in the minutes was likely to alter their view.
The minutes of the Oct. 28-29 meeting were released with the customary three-week delay. At the October meeting the Fed announced that it was ending its bond buying program, which it had been gradually reducing since last December. That program was aimed at keeping long-term interest rates low.
The statement did drop a reference it had been making to a "significant underutilization' of labour market resources. Instead, it said that improving labour market indicators suggested that the "underutilization" of labour market resources was "gradually diminishing." The change was viewed as a sign that the Fed's concerns about weakness in the labour markets had lessened somewhat.
The central bank has kept its target for a key short-term rate at a record low near zero since December 2008.