By Nick Timiraos
Then-Federal Reserve Chairwoman Janet Yellen pressed ahead in December 2015 with the central bank's first interest rate increase in nearly a decade despite several colleagues' misgivings over global economic weakness and weak inflation pressures, according to transcripts of the policy meeting released Friday.
Ms. Yellen, who has been nominated by President-elect Joe Biden to serve as Treasury secretary, argued for raising short-term rates to slow hiring and pre-empt inflationary pressures that could require more aggressive rate increases later.
"We would want to check the pace of employment growth somewhat to reduce the risk of overheating that could eventually force us to tighten abruptly," she said at the Dec. 16 meeting. The decision to lift interest rates from near zero after holding them there for seven years was approved unanimously by the rate-setting Federal Open Market Committee.
But Ms. Yellen allowed for the risk that inflation dynamics weren't operating as they had in prior periods, which is what transpired. "A more radical rethinking...would surely be in order," she said, if inflation remained "persistently subdued...despite further improvements in the labor market."
The Fed publishes a written summary of its policy meetings after a three-week delay, but these minutes don't include verbatim quotes or identify speakers by name. Transcripts of the discussions providing those details are released after more than five years. The Fed on Friday released the transcripts of all its 2015 FOMC meetings.
The Fed ended up raising rates only once in the following year after a global growth swoon slowed the U.S. economy in the first half of 2016. The Fed continued to lift rates in 2017 and 2018. Market upheaval and a stall in global growth prompted Ms. Yellen's successor, Fed Chairman Jerome Powell, to signal an end to rate increases in early 2019.
The Fed raised rates in 2015 with inflation running below the central bank's 2% target. Officials projected that falling unemployment would eventually firm up prices, and inflation held briefly near the Fed's 2% target in 2018.
But officials last year approved a new policy-setting strategy that commits them to waiting for stronger evidence that inflation will hold at or above 2% before raising rates, essentially abandoning the pre-emptive approach that guided them in 2015.
Officials made the change because they are concerned that longer intervals in which interest rates are pinned near zero, sometimes called the "zero lower bound," will make it increasingly difficult to achieve their 2% target.
They have recently suggested it could take them at least three years to meet these new thresholds for raising rates, and a stronger-than-expected recovery from the coronavirus pandemic could test the Fed's commitment to this strategy of holding rates lower for longer.
Fed officials were under considerable pressure in 2015 from critics of easy-money policies to raise rates more than they did. But in recent years, as inflation reached the 2% target only in 2018, other critics have said the rate increases proved premature.
Mr. Powell, then a Fed governor, supported the 2015 rate increase but worried about downward pressure on expectations of future inflation, which officials believe plays an important role determining actual price changes.
Ensuring stable inflation expectations "is a challenge that the committee simply has to meet," Mr. Powell said at the Dec. 16, 2015, meeting. "The fact that we're much more likely than anyone would like to return to the zero lower bound makes this all the more important."
Mr. Powell offered advice that could be relevant in the coming years, as the central bank works again to push inflation back up to 2%. "Market participants should look back on this period and be convinced that the committee is determined to get back to 2% inflation and is willing to run some risk" of allowing unemployment to fall to lower levels associated with higher price pressures, he said.
Others at the meeting expressed greater doubt about raising rates. "There's not a slam-dunk case for tightening at this meeting," said William Dudley, then the president of the New York Fed.
He warned that weakness in emerging market economies and a stronger dollar could lead to a drag in foreign trade that slowed economic growth, which is what transpired in early 2016, leading the Fed to delay anticipated rate increases until the following December.
Mr. Dudley recalled the run-up to the 2007-09 recession that was touched off by a housing slowdown. "As the stress intensified and persisted, more and more things broke," he said. "This just shows the limits of model-based forecasts that have trouble incorporating these types of reinforcing dynamics."
Fed governor Lael Brainard, who also voted for the increase, said risks of slower growth abroad "leads me to place somewhat greater weight on the possible regret associated with tightening too early than on the possible regret associated with waiting a little longer to see some of these risks play out."
Ms. Brainard observed that the forces that had kept inflation below the Fed's 2% target "have been remarkably persistent."
Then-Fed governor Daniel Tarullo said at the meeting he thought raising rates was the wrong decision because he wasn't convinced that past relationships between lower unemployment and higher inflation would necessarily return. "There is a possibility that a significant shift in how the economy operates...has been under way," said Mr. Tarullo, who resigned from the Fed in April 2017.
Dissents by Fed governors have been rare. None have dissented since 2005. Mr. Tarullo said at the meeting he would vote with Ms. Yellen because the increase had been so strongly signaled in advance and because he believed the first rate increase in seven years "would be a particularly bad time" to undercut her leadership position.
Write to Nick Timiraos at nick.timiraos@wsj.com
(END) Dow Jones Newswires
01-08-21 1634ET
