Fed Officials Debated Rate Liftoff in 2015, Offering Lessons for Today

The Federal Reserve lifted interest rates from near-zero in 2015 after years of holding them at rock bottom following the 2008 global financial crisis. Transcripts from their policy discussions, released Friday, show just how fraught that decision was.

The debate that played out then is especially relevant at a time when the central bank has again slashed interest rates practically to zero, this time to fight the pandemic-induced economic downturn. The concerns that officials voiced over lifting rates in 2015 — that inflation would not pick up, and that the labor market had further to heal — proved prescient in ways that will inform policy setting in the years to come.

The Fed, under Chair Janet L. Yellen, raised its policy rate in 2015 as the unemployment rate dropped. Officials worried that if they waited too long to nudge borrowing costs higher, they would stoke an economic overheating that would push inflation higher and prove hard to contain.

The logic, at the time, was that monetary policy works with “long and variable” lags, and it was better to start to gently normalize policy before rapid price gains actually showed up.

But even back then, not everyone on the Fed’s rate-setting Federal Open Market Committee was comfortable with the plan. When the decision to lift interest rates came in December, Governor Lael Brainard seemed to question it — arguing that the labor market still had room to expand and that inflation was coming in short of the committee’s 2 percent goal. She ultimately voted for the decision alongside Ms. Yellen and her fellow policymakers.

“The recent price data give little hint that this undershooting of our target will end any time soon,” Ms. Brainard said of inflation at the time, according to the transcript. That, paired with risks from a slowdown overseas, made her place “somewhat greater weight on the possible regret associated with tightening too early than on the possible regret associated with waiting a little longer.”

In explaining that she would vote for the increase anyway, Ms. Brainard said that she placed “a very high premium on ensuring the credibility of monetary policy” and appreciated the thoughtful process Ms. Yellen and the staff had undergone in planning to change the policy. She suggested in 2019 that moving rates up in 2015 was a mistake, and that “a better alternative would have been to delay liftoff until we had achieved our targets.”

Stanley Fischer, the vice chairman at the time, laid out a concise explanation of why the committee was moving.

“Why move now?” he said. “First, as the chair has emphasized, our actions become effective with a lag. Second, there are some signs of accumulating financial stability problems. And, third, the signal we will be sending will reinforce the fact that our economic situation is continuing to normalize.”

Jerome H. Powell, then a Fed governor and now the central bank’s chair, said at the time that remaining room for labor market gains was “probably modest” but highly uncertain, and that the participation rate — which measures people working or looking for work — might rebound.

“I’m not in any hurry to conclude that the current low level of participation reflects immutable structural factors,” Mr. Powell said. “I think it’s likely to be necessary for the economy to run above trend for some time to ensure that inflation does reach our 2 percent target.”

The more reticent stances aged comparatively well. The Fed’s pre-emptive rate increases have been viewed by many economists and analysts in the time since as possibly premature. The unemployment rate continued to drop for years, but as more workers came into the job market, wages increased only moderately. Price gains remained stable, and actually a bit softer than Fed officials were hoping.

As a result, the Fed has reassessed how it sets monetary policy. Mr. Powell said earlier this year that he and his colleagues will now focus on “shortfalls” from full employment — worrying only if the job market is coming in weak, not if it’s coming in strong, as long as inflation is contained.

They no longer plan to raise interest rates to fend off inflation before it actually shows up, officials have said, paving the way for longer periods of lower rates.

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