Fed Still Waving Caution Flag on Resuming Interest Rate Increases

WASHINGTON — Federal Reserve officials not only decided against raising interest rates at their most recent meeting in March, but they also came close to ruling out an increase at their next meeting this month.

The Fed is in a patient mood despite the continued expansion of the American economy because the pace of domestic growth is still modest and the global economy remains weak. Officials still see more reasons to worry about raising rates too quickly than reasons to worry about waiting, according to an official account of the March policy meeting, which the Fed published on Wednesday.

Indeed, several officials at the March meeting said they were already leaning against a rate increase in April because that “would signal a sense of urgency they did not think appropriate.”

A week ago, Janet L. Yellen, the Fed’s chairwoman, emphasized the need for patience, and officials at the coming meeting are likely to cement expectations that the Fed’s policy-making committee, the Federal Open Market Committee, will not seriously consider raising interest rates until June.

Yet the account also described significant divisions among the 17 officials on the committee regarding basic issues, like the strength of inflation and the risk weak global growth poses to the domestic economy.

Some officials continue to push for a faster pace of rate increases. Esther L. George, president of the Federal Reserve Bank of Kansas City, noted in an interview this week that concerns about financial markets and global growth had not been sufficient to shift the Fed’s economic outlook, and so those worries should not have derailed its plans.

“As I look historically at when policy has gotten off-track, I think it is that desire, which I absolutely understand, to wait for more certainty,” said Ms. George, the only member of the policy committee who voted to raise the Fed’s benchmark rate at the March meeting. “You want to see that the economy is on as stable a footing as it can be. But historically those waits can be costly.”

The Fed raised its benchmark rate in December for the first time since the financial crisis. It held short-term rates near zero for seven years to encourage borrowing and risk-taking. By raising rates as the economy gains strength, the Fed now plans to gradually reduce those incentives.

But in March, the Fed decided against raising rates for a second time, and it indicated plans to raise rates this year by half a percentage point, not a full point.

Ms. Yellen and other Fed officials have emphasized since the meeting that they do not see evidence of economic weakening. The meeting account described domestic growth as “resilient.”

But a tightening of financial conditions has done some of the Fed’s work, raising borrowing costs without an increase in the Fed’s benchmark rate. And the account said officials saw an increased risk that problems elsewhere could disrupt the relative strength of domestic growth.

“Several participants expressed the view that the underlying factors abroad that led to a sharp, though temporary, deterioration in global financial conditions earlier this year had not been fully resolved and thus posed ongoing downside risks,” the account said. While the Fed’s economic forecast held steady, the number of officials who saw underperformance as the most likely alternative outcome jumped to eight, from just three in the last survey, in December.

There’s also a strategic argument for caution. The Fed still has little room to respond to any signs of weakness by cutting rates, its traditional and most powerful tool. At the same time, Ms. Yellen and her allies argued the Fed could respond to faster growth by raising rates more quickly.

“This asymmetry,” the March meeting account said, “made it prudent to wait for additional information regarding the underlying strength of economic activity and prospects for inflation before taking another step to reduce policy accommodation.”

Ms. George said this understated the risks of moving quickly. “When I hear people say, ‘We can raise rates quickly,’ mechanically, that’s true,” she said. “Is that desirable? I don’t think so.”

Ms. George and one other official, who did not have a vote at this meeting, agreed that rates should be raised in March. A broader group, however, wasn’t ready to write off April. Several officials, the account said, thought a rate increase then still “might well be warranted.”

The account made clear that the Fed’s primary focus is on the strength of the economy, with little concern about faster inflation. Instead, officials debated whether inflation remained too weak or whether it was returning to a normal pace.

Some inflation measures have increased in recent months. The Fed’s preferred gauge estimated that prices increased by 1.7 percent over the 12 months that ended in February, the highest reading in some time and close to the 2 percent annual pace the Fed regards as optimal.

Ms. Yellen and other Fed officials, however, have said they are not yet convinced that a strengthening trend has taken hold. Fed officials’ latest projections, published in March, showed most expected somewhat weaker inflation this year.

“Some participants saw the increase as consistent with a firming trend in inflation,” the account said. “Some others, however, expressed the view that the increase was unlikely to be sustained, in part because it appeared to reflect, to an appreciable degree, increases in prices that had been relatively volatile in the past.”