US Federal Reserve last month saw a declining risk of recession

WASHINGTON (AP) — The United States (US) Federal Reserve’s policymaking committee saw much less risk of recession at its meeting last December, when it kept interest rates steady after three straight cuts and signalled that it expected to keep low rates unchanged through this year.

Minutes of last December meeting, released on Friday, showed that Fed officials favoured keeping rates in a low range of 1.5 per cent to 1.75 per cent to cushion the US economy from slow global growth and the Trump administration’s trade conflicts. Officials were also concerned that inflation still hadn’t reached the Fed’s target level of two per cent.

Still, many Fed policymakers at last December 10-11 meeting expressed the view that the risks of a US-China trade war had diminished along with the probability of a disruptive Brexit. The meeting occurred two days before the Trump administration and Beijing reached a preliminary trade deal, though press reports had already suggested that an initial agreement was near.

At their meeting last month, Fed officials noted that the US economy was “showing resilience” despite the trade fights and a weak global economy, the minutes said. A rise in long-term rates also “suggested that the likelihood of a recession occurring over the medium term had fallen noticeably in recent months”.

Since last month’s meeting, though, tensions have escalated in the Middle East as the Trump administration has confronted Iranian-backed forces in Iraq. On Friday, stocks sank on Wall Street and oil prices jumped after US forces in Iraq killed a top Iranian general.

Yet many analysts said higher oil prices could potentially benefit the US economy because of the sharp increase in the past decade in US oil production. Higher oil prices encourage energy companies to invest in drilling wells, which boosts demand for steel pipe and other equipment from US factories and creates jobs.

Those trends increasingly offset the drag on consumer spending exerted by higher gas prices. Joe Brusuelas, chief economist at the tax advisory firm RSM, suggested that the risks to the US economy “are, for now, contained”.

Federal Reserve Chair Jerome Powell arrives to speak at a news conference after the Federal Open Market Committee meeting in Washington on December 11, 2019. PHOTO: AP

“As a result, we do not expect any action by the Federal Reserve,” Brusuelas said. “There would need to be a much greater disruption to oil supply from the Persian Gulf to warrant a rate cut by the Fed in the near term.”

But should Iran respond to the attack and military action escalates, the danger to the US economy could increase, economists said.

“The wild card is whether turmoil in the Middle East triggers a sustained sell-off in equities, depressing business and consumer confidence to the point where labour market and inflation concerns become secondary,” said Chief Economist at Pantheon Macroeconomics. Ian Shepherdson.

Though the Fed’s policymaking committee voted unanimously last month in favour of keeping rates unchanged, several members voiced concerns about the long-term consequences of very low rates.

Keeping rates ultra-low could fuel excessive risk-taking on Wall Street, a few participants warned, which could lead to dangerous asset bubbles. If those bubbles were to burst, it “could make the next recession more severe than otherwise”.

But a greater number of Fed officials felt that the job market could still strengthen and draw more people off the sidelines into jobs, without sending inflation up too much. That sentiment would favor keeping rates low to further reduce unemployment and stimulate economic growth.

Chairman Jerome Powell echoed that view in the post-meeting news conference, signalling that the Fed was comfortable with keeping rates low for the foreseeable future.

“We have learnt that unemployment can remain at quite low levels for an extended period of time without unwanted upward pressure on inflation,” Powell said at the news conference.

Fed officials also expressed concern that Americans’ expectation for future inflation “was too low”.

Inflation expectations, some argue, can become self-fulfilling: If workers expect low inflation, they’re less likely to demand higher pay, which, in turn, allows companies to keep a lid on prices.

Low inflation expectations are another reason for the Fed to keep rates down, in hopes that they will eventually boost inflation.