U.S. Fed frets over strong dollar, global woes: minutes

Wed Oct 8, 2014 6:45pm EDT
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By Michael Flaherty and Jonathan Spicer

WASHINGTON/NEW YORK (Reuters) - Federal Reserve officials want to tie an interest-rate rise to U.S. economic progress, but the minutes of their last policy meeting show they are struggling with how to come to grips with the dual threats of a stronger dollar and a global slowdown.

The minutes expressed concern the rising dollar could slow a needed rebound in inflation. They also highlighted economic turmoil in Europe and Asia, another factor behind the bank's keeping policy accommodation in place for the near future.

The minutes of the Sept. 16-17 meeting, released on Wednesday after the usual three-week lag, revealed concern the financial markets are slightly out of sync with the Fed, and that dropping the current policy guidance could send unintended signals.

In response, investors bid up U.S. stocks .SPX and bonds US10YT=RR, betting the Fed is in no rush to tighten after years of monetary stimulus. The U.S. dollar .DXY, which has risen in the last 12 weeks, hit a two-week low.

"The Fed is becoming increasingly focused on the potential impact of the stronger dollar on the domestic economy at a time when the global growth momentum is beginning to slow, and the uncertainties this is adding to the economic outlook," said Millan Mulraine, deputy head of research and strategy at TD Securities.

Debate within the Fed heated up over how to adopt a more "data-dependent" policy guidance.

Several policymakers fretted the current guidance that rates will not rise for a "considerable time" after October gave the false impression the stimulus would last a long while. Others worried a change could trip up financial markets and hurt the economy through higher borrowing costs.

The change would "likely present communication challenges" and "caution will be needed to avoid sending unintended signals about the Committee’s policy outlook," the minutes said.   Continued...

U.S. Federal Reserve Chair Janet Yellen (L) and Treasury Secretary Jack Lew (R) confer after a meeting of the Financial Stability Oversight Council at the Treasury Department in Washington October 6, 2014. REUTERS/Jonathan Ernst