Minutes of the Fed's Jan. 27-28 meeting released Wednesday suggest that policymakers aren't ready to start raising rates anytime soon, with some expressing concerns about excessively low inflation, lingering weakness in the U.S. job market and economic threats overseas.
The Fed's benchmark interest rate has been near zero since December 2008.
Many officials "observed that a premature increase in rates might damp the apparent solid recovery in real activity and labour market conditions," said the minutes, released after a customary three-week delay.
Analysts said they believed the minutes made a June rate hike less likely, given the concerns expressed by various Fed officials about the state of the economy.
"A fair number of policymakers still want reassurance that growth will remain strong and inflation will return to the 2 per cent target before beginning the normalization process," said Sal Guatieri, senior economist at BMO Capital Markets.
He added that the minutes raised the odds that the first rate hike will be delayed until September or possibly even later.
Wall Street investors reacted favourably to the minutes. Losses in the stock market eased and bond prices rose, pulling the yield on the 10-year note down to 2.07 per cent from 2.14 per cent late Tuesday.
The minutes indicate that policymakers were worried about dropping the word "patient" to describe how long they were willing to wait, fearing that financial markets might overreact. They also were unable to determine what exactly they needed to see in economic data to begin normalizing monetary policy. What they did agree on was that "it would be difficult to specify in advance an exhaustive list of economic indicators and the values that these indicators would need to take."
On one hand, job growth has been encouraging. The government reported earlier this month that the economy created 257,000 jobs in January, wrapping up the strongest three months for hiring in 17 years. The unemployment rate rose to 5.7 per cent, up from 5.6 per cent in December, but the increase came for a good reason. People who had become discouraged and dropped out of the labour market resumed looking for work.
The 5.7 per cent unemployment rate is close to the Fed's goal of maximum employment, which it pegs currently at 5.2 per cent to 5.5 per cent unemployment.
But Fed officials noted that wage growth has remained weak even as the unemployment rate has fallen. They also discussed at length their concerns about stubbornly low inflation, which remains below the Fed's 2 per cent target. Several officials warned that the credibility of that target could be undermined if they raised rates despite low inflation.
Fed officials outlined various overseas threats to U.S. growth, including a stronger dollar, slowing growth in big economies like China and political tensions in the Middle East and Ukraine.