Fed Dissenters 1ncreasingly Vocal About 1nflation Fears

Janet L. Yellen, the Fed chairwoman, is facing an increasingly vocal group of dissenters on her policy-making committee. By BINYAMIN APPELBAUM August 20, 2014

WASHINGTON — Federal Reserve officials are increasingly divided about how much better the economic recovery is likely to get.

Officials are more confident that the economy is gaining strength after years of false starts, according to an account of the most recent meeting of the Fed's policy-making committee, published Wednesday. The Fed's chairwoman, Janet L. Yellen, and her allies maintained the central bank's stimulus campaign at the July meeting, arguing that the Fed can now help millions of unemployed Americans find new jobs.

An increasingly vocal group of dissenters, however, saw evidence that the Fed had nearly exhausted its ability to repair damage caused by the recession. They argued that the Fed must retreat quickly to maintain control of inflation.

The debate will receive a public airing Friday and Saturday when central bankers, including Fed officials, and academic economists convene in Jackson Hole, Wyo., for an annual conference held by the Federal Reserve Bank of Kansas City. This year's theme is labor markets.

Labor markets have improved more quickly than the Fed expected at the beginning of the year, according to the minutes of the July meeting. The unemployment rate, in particular, stood at 6.2 percent in July. But while officials agree that the finish line for the Fed's extraordinary stimulus campaign is drawing closer, they do not agree on where it is.

"Participants generally agreed that both the recent improvement in labor market conditions and the cumulative progress over the past year had been greater than anticipated and that labor market conditions had moved noticeably closer to those viewed as normal in the longer run," the minutes said. "Participants differed, however, in their assessments of the remaining degree of labor market slack and how to measure it."

Most officials, according to the minutes, take the view that the unemployment rate overstates progress in the labor markets, because an unusually large number of Americans have stopped looking for work, but are likely to resume their searches as the economy improves. Ms. Yellen has espoused this view repeatedly, and she is expected to defend it once again when she delivers a keynote speech Friday in Jackson Hole.

But Fed officials have gradually acknowledged that some damage caused by the recession has likely passed beyond the point of repair — some of the people who lost jobs will never work again. And in July, the Fed once again increased its estimate of the scale of this damage.

Officials also noted that inflation, while still slower than the Fed would like, is also returning toward normal levels somewhat more quickly than expected.

"Many participants noted that if convergence toward the committee's objectives occurred more quickly than expected, it might become appropriate to begin removing monetary policy accommodation sooner than they currently anticipated," the meeting account said.

Some officials see all of this as evidence that the Fed is rapidly approaching the limits of its abilities. One voting member of the committee, Charles Plosser, president of the Federal Reserve Bank of Philadelphia, dissented at the July meeting, arguing that it was time for the Fed to signal that it was getting closer to raising interest rates.

According to the minutes, some other officials who do not vote this year also were "increasingly uncomfortable with the committee's forward guidance" that rates are likely to remain low for some time.

One issue on which the committee remains unified: Fed officials still don't see much evidence that financial markets are overheating.

"Participants noted evidence of valuation pressures in some particular asset markets, but those pressures did not appear to be widespread and other measures of vulnerability in the financial system were at low to moderate levels," the account said.

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