Fed Transcripts Show Doubts About Need for 2015 Rate Hike

January 11, 2021 Updated: January 11, 2021

WASHINGTON—Newly released transcripts show that many Federal Reserve officials had concerns in late 2015 over whether they were making a mistake in raising a key interest rate for the first time in nearly a decade.

Transcripts of their discussions, released on Jan. 8, showed that the chief concern was whether the Fed would be acting prematurely in starting to raise rates given how low inflation was at the time.

In the end, the Fed unanimously approved a quarter-point hike in its policy rate, the first change in the rate since the central bank slashed it to a record low of zero to 0.25 percent in December 2008 at the height of the financial crisis.

During their debate on the change, many officials expressed worries that the small rate hike was being made even though inflation for the past six years had fallen below the Fed’s 2 percent target.

The Fed manages interest rates, hiking rates to slow the economy if inflation appears to be rising too quickly and cutting rates to give the economy a boost if the jobless rate is too high.

Fed Chair Janet Yellen, who has been tapped by President-elect Joe Biden to be Treasury secretary, said at the time in arguing for the small initial rate hike that inflation had been held down in 2015 by a sharp drop in oil prices that had kept the Fed’s inflation target running below 0.5 percent. But she said with oil prices rising again, she was “reasonably confident” that inflation over the next 2 to 3 years would reach the Fed’s 2 percent target, and for that reason a small initial move to hike rates was warranted.

However, in 2016, falling prices for such things as cellphones kept inflation low and since that time, inflation has continued to run below the Fed’s 2 percent target.

Yellen noted that the unemployment in late 2015 stood at 5 percent, 0.7 percentage-point below where it was at the beginning of the year, and businesses were beginning to talk about rising wage pressures. As it turned out, unemployment continued to decline, hitting a 50-year low of 3.9 percent before the pandemic-induced recession started in February 2020.

Daniel Tarullo, at the time a member of the Fed’s board, said he was going along with the December 2015 rate hike but mainly because he believed it was important for the Fed board members to show unanimity with the position taken by the Fed chair.

“The moment of liftoff after seven years would be a particularly bad time to enter a dissent and thereby risk the chair’s leadership position at a critical time in monetary policy,” Tarullo said.

Fed board member Lael Brainard also expressed doubts about the need for a rate hike given the low inflation, but said she would go along with the modest increase.

While winning the vote, Yellen let it be known that she was mindful of opposing views, joking at the end of the discussion that any Fed official who wanted to watch her after-the-meeting news conference and “see me get skewered” by reporters could do so.

As it turned out, the quarter-point increase in the Fed’s benchmark rate in December 2015, lifting it to 0.25 percent to 0.5 percent, wasn’t followed by another rate increase for a full year, when it was increased by another quarter-point in December 2016. That increase was followed by three quarter-point rate increases in 2017 as economic growth increased and the unemployment rate fell further.

The Fed raised rates four times in 2018 after Yellen was replaced by Jerome Powell as Fed chair by President Donald Trump. Trump launched an unprecedented attack on the Fed’s rate hikes, over potential negative effects on economic growth.

Beginning in 2019, the Fed started cutting rates and in 2020 after the pandemic pushed the country into a recession, the Fed returned its benchmark rate to the record-tying low of zero to 0.25 percent, where it had been after the 2008 financial crisis.

The Fed releases minutes that summarize its closed-door discussions with a three-week lag after each meeting but doesn’t release transcripts of the meetings until five years have passed.

By Martin Crutsinger