What the Fed was thinking when it finally raised interest rates last month

Deep thoughts.
Deep thoughts.
Image: Reuters/Gary Cameron
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The Federal Reserve’s December decision to hike its target interest rate above zero was a big deal. Huge deal. We even made a t-shirt to commemorate the occasion. Now that the dust has settled, investors, economists, and layman central bank watchers alike are going to be watching to see what’s going to happen next.

But to forecast what the central bank governors will do at their next meeting, it’s helpful to know what they actually discussed at their last meeting. And for that, we have the Fed’s freshly released minutes from the momentous, year-end gathering. Here are a few of the things that were on the central bank governors’ minds in December.

Inflation (176 mentions)

Yep, the decline in oil prices is still leaving its “transitory” mark on inflation, which should be snapping back to normal any month now. From the minutes:

Nearly all participants were now reasonably confident that inflation would move back to 2 percent over the medium term. However, because of the recent further decline in crude oil prices, many participants judged that falling energy prices would depress headline inflation somewhat longer than previously anticipated.

Energy (68 mentions)

Speaking of oil, the energy industry is a big factor holding back America’s struggling domestic manufacturing sector. From the minutes:

However, manufacturing activity overall continued to be restrained by weakness in industries with significant international exposures, such as steel, agricultural and drilling equipment, and chemicals. In addition, domestic energy producers and their service suppliers remained under significant pressure from the excess supply of crude oil and declining prices. The cutbacks in drilling led to further reductions in capital spending and to layoffs; credit conditions for some firms continued to deteriorate.

Labor market (54 mentions)

Unemployment is falling and jobs growth is pretty strong, but something seems to be preventing those advancements from a major affect on inflation. From the minutes:

Because labor compensation was still increasing at a subdued rate and inflation remained well below 2 percent, some participants judged that a moderate further decline in unemployment would be unlikely to lead to a buildup of unduly strong inflation pressures.

Target range (26 mentions)

The Fed wants to slowly-but-surely keep raising interest rates so that it has more room to maneuver in case another crisis breaks out. From the minutes:

Moreover, the ability of monetary policy to offset the economic effects of an unanticipated economic shock remained asymmetric, and a cautious approach to normalizing policy could help minimize the risk of having to respond to a negative economic shock while the policy rate remained near its effective lower bound.

China (4 mentions)

What was previously an ominous weight on growth prospects has been downgraded to “risks to the global economy that emerged late this summer.” But that doesn’t mean that developments across the Pacific aren’t making Fed members nervous. From the minutes:

However, participants cited a number of lingering concerns, including the possibility that further dollar appreciation and persistent weakness in commodity prices could increase the stress on emerging market economies and that China could find it difficult to navigate the cyclical and structural changes under way in its economy.

Fiscal (4 mentions)

Like Fed chair Janet Yellen and her predecessor Ben Bernanke have been saying for years, the US Congress needed to do its fair share to boost the US economy. From the minutes:

As a result of the recently passed Bipartisan Budget Act, federal spending was expected to provide a modest boost to economic activity over the next few years. Contacts in one District with a relatively large amount of federal government activity reported that their businesses would also benefit from the reduced uncertainty about the federal fiscal outlook.