Investing.com -- While every voting member of the Federal Open Market Committee agreed that conditions in the U.S. labor market and inflation were appropriate to raise short-term interest rates last month, some participants expressed concern that subdued inflation could affect the timing of further rate hikes, the minutes from the historic meeting showed on Wednesday.
In a unanimous decision on December 16, the FOMC increased its benchmark Federal Funds Rate by 25 basis points to a range between 0.25 and 0.50%, ending a zero interest rate policy it maintained since December, 2008, at the height of the Financial Crisis. Unlike the Fed's previous tightening cycle, Fed chair Janet Yellen promised that the FOMC will not be mechanical in its approach to normalize monetary policy by keeping a close eye on incoming economic data before it decides to raise rates again. For a two-year period beginning in 2004, the FOMC raised the Fed Funds Rate by 25 basis points in 17 consecutive meetings, culminating in a quarter-point hike in June, 2006 to 5.25%.
The 10 voting members present at the December meeting were all in agreement that the pace of tightening this year would be gradual and would remain low in the long-run future for some time. Market players are closely parsing Fed statements for clues on the path of further rate hikes, as the U.S. central bank applies as it continues to normalize monetary policy. Earlier on Wednesday, Fed vice chairman Stanley Fischer said in an exclusive interview with CNBC, that estimates of four interest rate hikes in 2016 were in the right "ballpark." In long-range forecasts issued last month, the Federal Open Market Committee estimated that the upper range of its benchmark Federal Funds Rate will increase by 1.0% by the end of 2016 to 1.5%.
Still, there may be some dissension between FOMC on the timing of further hikes, as the December minutes indicated that several members regarded last month's lift-off as a "close call." The minutes also showed that those participants would need "greater confirmation," that inflation is moving toward the Fed's objective of 2% before they approved the next rate hike. Long-term inflation has remained under the Fed's targeted goal for every month over the last three years. Other participants believe that inflation will move higher as transitory factors from a stronger dollar and persistently low energy prices continue to recede.
The FOMC cited an uncertain inflation outlook, a subdued neutral real interest rate and a lack of flexibility for stabilizing the economy in the case of unanticipated shocks for factors in why it plans to raise rates gradually.
"Gradual adjustments in the federal funds rate would also allow policymakers to assess how the economy was responding to increases in interest rates. In addition, by several estimates, the neutral short-term real interest rate was currently close to zero and was expected to rise only slowly as headwinds restraining the expansion receded," the FOMC said in the statement. "Moreover, the ability of monetary policy to offset the economic effects of an unanticipated economic shock remained asymmetric, and a cautious approach to normalizing policy could help minimize the risk of having to respond to a negative economic shock while the policy rate remained near its effective lower bound."
In terms of its evaluation of economic conditions abroad, FOMC members judged that global economic risks had receded in recent months, while anticipating further improvements this year. In September, the FOMC delayed an inevitable rate hike in part due to weak economic indicators in China and a slowdown in emerging markets. On Monday, the Shanghai Composite Index crashed as much as 7% following the release of soft manufacturing data last month. The Fed also noted in the minutes that lingering concerns remain in regards to further dollar appreciations, the persistent rout in commodity prices and continued difficulties in China.
The CME Group's (O:CME) Fed Watch tool placed the probability of a January rate hike at 9.5% on Wednesday. The odds the Fed will raise rates in March are significantly higher, according to the Fed Watch, at 47.2%. The FOMC meets next on January 27.