WASHINGTON — Federal Reserve officials at their March meeting stressed the need to make sure record-low interest rates don’t feed new speculative bubbles in stocks or other assets.
At the same time, some officials said the Fed’s pledge to keep rates low for an “extended period” doesn’t mean a fixed period of time. Rather, it depends on the strength of the economy, according to minutes of the closed-door meeting released Tuesday. Many analysts have taken the pledge to mean rates would stay at record lows for roughly six months to help underpin the recovery.
Fed officials argued that the pledge won’t stop the Fed from boosting rates if the economy shows signs of picking up substantially or if inflation takes off. On the other hand, the pledge “could last for some time” if the economy takes a turn for the worse.
A few members thought the risks of boosting rates too soon exceeded the risks of doing so later. To aid the recovery, the Fed at its March 16 meeting held the target range for its bank lending rate at zero to 0.25 percent. It has stood at that level since December 2008. And it maintained a pledge — in place for a year — to keep rates at rock-bottom levels.
Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, for a second straight meeting was the sole member to oppose keeping that pledge. Analysts saw Hoenig as concerned that holding rates too low for too long could feed some new speculative bubble in assets such as stocks or commodities.
The Fed has leeway to hold rates low because inflation isn’t a threat. Most Fed officials believed substantial “slack” in the economy would continue to tamp down inflation pressures, the minutes said.
By slack, Fed officials mean the fact that factories and other businesses are still operating below full throttle and that the job market — while improving — remains weak. Workers won’t be able to negotiate sizable pay raises or other compensation any time soon.
Companies will be hard-pressed to ratchet up retail prices when shoppers are reluctant to go on spending sprees. All those forces should keep inflation in check.
