http://www.nytimes.com/2014/10/09/business/economy/fed-officials-reinforce-rate-outlook-but-seek-flexibility.html 2014-10-08 20:41:57 Fed Officials Reinforce Rate Outlook, but Seek Flexibility Federal Reserve policy makers want to signal that they are not ready to raise interest rates, according to an account of the most recent meeting. === WASHINGTON — The Fed plans to end its latest bond-buying campaign at the end of October, as the economy continues to improve. That means it must replace its guidance that it will keep rates near zero for a “considerable time” after the end of the campaign. Most Fed officials at the mid-September meeting said they wanted to eliminate any formal reference to a timeline, and instead to describe the decision as dependent on the Fed’s progress in reducing unemployment and raising the sluggish pace of inflation, In contemplating this shift, the Fed is seeking to preserve the general perception that a first increase is most likely around the middle of next year, while making clear that the timetable could change if the economy accelerates, or if growth slows. Investors appeared to welcome the signal. In the half-hour after the minutes’ release on Wednesday afternoon, the Dow Jones industrial average tacked on 100 points. The minutes showed that the central bank was continuing to play for time as it sought greater clarity about the health of the economy. Job growth has been relatively strong this year, and the unemployment rate is fast falling toward what the Fed regards as a normal level. But inflation has been relatively weak, a problem in its own right, and there is strong evidence the labor market may be weaker than it seems. Economic data since the meeting has accentuated both trends. The economy added 248,000 jobs in September, while inflation was again weaker than expected. The growth of other large economies is also lagging behind the United States, and some of those countries are pushing to devalue their currencies. Fed officials at the meeting expressed concerns that these trends could weaken domestic growth and further suppress inflation. The Fed’s staff reported that it did not expect inflation to reach the Fed’s preferred 2 percent annual pace over the next several years. Two Fed officials who are among the strongest advocates for the stimulus campaign warned this week against a premature rate increase. Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis, said Tuesday that if the economy maintained its current trajectory, it would be “inappropriate” to raise rates Charles Evans, president of the Federal Reserve Bank of Chicago, said Wednesday that he was “very uncomfortable” with calls for earlier rate increases. “I believe that the biggest risk we face today is prematurely engineering restrictive monetary conditions,” The stronger tone of recent remarks by the Fed’s activist wing is driven in part by the continued weakness of inflation. It also reflects a concern that the internal debate may be moving away from their views. An important question concerns the extent of slack in the labor market. The Fed described the remaining slack as “considerable” in its September statement, and the minutes made clear that most officials hold this view. “Participants noted variously that the level of nonfarm payroll jobs had only recently returned to its pre-recession level, that the number of individuals working part time for economic reasons was still elevated relative to the level of unemployment, and that the labor force participation rate was still below assessments of its structural trend,” it said. The Fed spent months developing a broader measure of labor market conditions, incorporating 19 data sources, and it said earlier this week that it would now publish the results monthly. But this The most powerful evidence against this view remains the slow pace of inflation. And this measure may offer increasing clarity in the coming months because historically, wages and prices start to rise as unemployment falls below 6 percent. Notably, Fed officials appear willing to wait and watch that experiment unfold. Two influential centrists said in the last week that they still considered it likely that the Fed would not raise rates before the middle of next year. William C. Dudley, president of the Federal Reserve Bank of New York, said Tuesday that he saw relatively little chance that economic growth would accelerate. He cited weak consumer spending and tight credit conditions. But he said the economy was now growing well enough that it was “reasonable” to expect the Fed would begin to raise its benchmark interest rate around the middle of next year. “I hope the economy cooperates,” He added, “That would be very good news even if it were to cause a bump or two in financial markets.”