Extracts From the Minutes of the Federal Open Market Committee:
Regarding the foreign economic outlook, it was noted that the slowdown in China's industrial sector and the decline in global commodity prices could restrain economic activity in the EMEs and other commodity-producing countries for some time. Participants discussed recent developments in China, including the possibility that structural changes and financial imbalances in the Chinese economy 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 and on commodity producers, including Canada and Mexico. Moreover, global financial markets could continue to be affected by uncertainty about China's exchange rate regime. While the exposure of the United States to the Chinese economy through direct trade ties was limited, a number of participants were concerned about the potential drag on the U.S. economy from the broader effects of a greater-than-expected slowdown in China and other EMEs.
Participants also discussed a range of issues related to financial market developments. Almost all participants cited a number of recent events as indicative of tighter financial conditions in the United States; these events included declines in equity prices, a widening in credit spreads, a further rise in the exchange value of the dollar, and an increase in financial market volatility.
In assessing whether economic conditions had improved sufficiently to warrant a further increase in the target range for the federal funds rate at this meeting, members agreed that labor market data had generally been stronger than anticipated at the time of the December meeting, and some members noted that wage growth had picked up. However, the spending and production data generally had been disappointing--in particular, information regarding indicators of manufacturing activity, consumption expenditures, and inventory investment. Regarding the outlook for inflation, the additional sharp declines in energy prices and strengthening of the exchange value of the dollar since the December meeting were likely to hold down inflation for longer than previously anticipated, but inflation was expected to increase gradually as energy prices and the prices of non-energy imports stabilized and the labor market strengthened further. A couple of members emphasized that direct evidence that inflation was rising toward 2 percent would be an important element of their assessments of the appropriate timing of further policy firming.
In discussing the appropriate path for the target range for the federal funds rate over the medium term, members agreed that it would be important to closely monitor global economic and financial developments and to continue to assess their implications for the labor market and inflation, and for the balance of risks to the outlook. Members expressed a range of views regarding the implications of recent economic and financial developments for the degree of uncertainty about the medium-term outlook, with many members judging that uncertainty had increased. Members generally agreed that the implications of the available information were not sufficiently clear to allow members to assess the balance of risks to the economic outlook in the Committee's postmeeting statement. However, members observed that if the recent tightening of global financial conditions was sustained, it could be a factor amplifying downside risks.