Financial markets turmoil has clouded the US economic outlook and will be a key factor in charting interest rate increases, the minutes of the Federal Reserve's January meeting showed Wednesday.
Participants at the January 26-27 meeting of the Federal Open Market Committee "emphasized that the timing and pace of adjustments will depend on future economic and financial market developments and their implications for the medium-term economic outlook," the minutes said.
Generally, the policymakers saw that risks to the US economic outlook had worsened since they lifted interest rates for the first time in more than nine years in mid-December, by a modest quarter percentage point.
Intending to normalize rates after keeping them near zero for seven years to support the economy's recovery from the Great Recession, the Fed at that time had envisioned four rate hikes this year in gradual steps.
But at the January FOMC meeting, policymakers noted mixed US economic data and a turbulent start to the year in global financial markets, and left the federal funds rate range at 0.25-0.50 percent.
Participants judged that the implication of recent developments for the outlook on the US economy was unclear, "but they agreed that uncertainty had increased, and many saw these developments as increasing the downside risks to the outlook."
They discussed "tighter" financial conditions in the United States, including the market volatility that had pushed share prices sharply lower and sent the dollar higher, according to the minutes.
Some expressed the view that the markets were doing some of the Fed's heavy lifting on tightening credit. "The effects of these financial developments, if they were to persist, may be roughly equivalent to those from further firming in monetary policy," according to the minutes.
Officials also voiced concern that recent structural changes and financial imbalances in China "might lead to a sharper deceleration in economic growth in that country than was generally anticipated."
"Such a downshift, if it occurred, could increase the economic and financial stresses on other EMEs (emerging-market economies) and on commodity producers, including Canada and Mexico," among the top US trade partners.
"Moreover, global financial markets could continue to be affected by uncertainty about China's exchange rate regime."
- China drag -
Some participants "were concerned about the potential drag on the US economy from the broader effects of a greater-than-expected slowdown in China and other EMEs."
The dollar was little changed in the wake of the release of the report.
"The minutes are indeed a more dovish tint to the Fed's language and on balance, likely suggest a lower likelihood of the Fed raising rates in March. However, the market was already positioned for dovish minutes so there was little in the way of surprise in these minutes," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange.
Markets do not foresee a rate increase at the March 15-16 FOMC meeting, and indicate expectations for the next hike to come only in 2017.
Moody's Analytics analyst Ryan Sweet predicted the Fed would wait to raise rates in June, as major central banks, like the European Central Bank and the Bank of Japan, have adopted negative interest rates, "boosting the US dollar and pushing long-term US interest rates lower."
"Financial markets have already done some of the Fed's work for it, and the central bank wants to avoid piling on more tightening," he said.