Make no mistake about it — Federal Reserve Chair Janet Yellen and her colleagues like what they see in the U.S. economy and still expect to raise interest rates this year.
Even so, minutes from their January meeting raised a number of yellow flags that inclined them toward leaving the federal funds rate near zero for longer.
Here are five concerns policy makers expressed in the minutes:
1. Wage growth is still too slow
Year-on-year growth in average hourly earnings — a closely watched measure of wages — has been stuck in a 2 percent range for almost the entire expansion. While economists debate signs that it may be picking up, wage growth is still far from the 3 percent to 4 percent Yellen has indicated is typical.
Few companies see a need to boost compensation to get the kind of labor they need even though corporate balance sheets are rich in cash. "Tepid nominal wage growth, if continued, could become a significant restraining factor for household spending," the minutes said.
2. There's a dark side to lower oil prices
The minutes mentioned that persistently low energy prices might result in a "larger retrenchment of employment in these industries."
Also, if investment in this sector "slowed significantly, it could damp" the expansion for a time, the minutes said. The Fed's industrial production report for January showed signs of decreasing drilling activity, which could be a harbinger for lower investment. Drilling of oil and gas wells slumped 10 percent, the fourth straight decline and the biggest decrease since March 2009.
3. Stronger may not be better
Fed officials also said the strongest dollar in a decade "was expected to be a persistent source of restraint" on U.S. exports. A rising dollar can make U.S. goods more expensive for other countries to buy over time, crimping demand for domestic producers. Companies from drugmaker Pfizer Inc. to Microsoft Corp. have already lamented that their profits were hurt in 2014 or will be in the coming months due to the dollar's rise.
4. Inflation is too low
There was an intense debate among Fed officials about inflation. The conversation can largely be divided into two camps. One group argued that most of the downward pressure on inflation is related to temporary price movements. They noted that measures of inflation that lop off extreme price moves, such as the Dallas Fed's Trimmed Mean measure of the personal consumption expenditures price index, have been stable.
Another group focused on the "continued weakness" in inflation measures minus food and energy. There were also concerns that stagnant wage growth would delay inflation's return to the Fed's 2 percent target. Prices tied to consumer spending rose just 1.3 percent last year after stripping out food and fuel.
Some dismissed market-based measures that forecast lower risks of inflation in the future, noting inflation expectations among households seem steady. Others countered that Japan had stable survey measures even as they sank into deflation.
5. Communication is risky and hard
The minutes show that Fed officials are tired of "forward guidance," or phrases that make a pledge on interest rates in one way or another. They also feel handcuffed by it. The FOMC introduced the word "patient" into the statement in December to describe its approach to raising interest rates. Taking that phrase out risks "a shift in market expectations for the beginning of policy firming toward an unduly narrow range of dates," the minutes said. What the FOMC wants to do is cut back its wordy statement and get markets to focus on data instead of phrases.
The minutes were "like free floating anxiety from the Fed," said Quincy Krosby, market strategist at Prudential Financial Inc. in Newark, New Jersey. "But the data on job growth and wages is turning."
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