Fed: Slowing overseas growth could hurt U.S. economy

WASHINGTON - Federal Reserve officials expect the plunging oil prices to boost the the U.S. economy, but are keeping a close eye on weakening overseas growth.

Minutes of the Fed's Dec. 16-17 meeting released Wednesday show that Fed officials believed weakness in the global economy posed some of the biggest downside risks, particularly if it caused turmoil in global financial markets. But the Fed officials believed that overall, the sharp declines in oil prices would be beneficial to the economy.

"Several participants indicated that they expected slower economic growth abroad to negatively affect the U.S. economy, principally through lower net exports, but the net effect of lower oil prices on U.S. economic activity was anticipated to be positive," the Federal Open Market Committee, which sets interest rates, said in the notes.

The minutes showed Fed officials were concerned about over-reaction in markets to changes in their guidance about future rate hikes and decided to declare their view that the central bank intended to be "patient" in moving toward a rate hike.

The minutes were released with the customary three-week delay. At the meeting, the Fed added that its new language was consistent with its previous guidance that it would keep rates low for a "considerable time."

Many economists believe that the Fed will not start raising rates until June and might even wait longer if inflation remains persistently below its 2 percent target.

The biggest takeaway from the latest Fed notes is that the central bank appears ready to proceed with rate hikes this year despite persistently low inflation, said Paul Edelstein, an economist with IHS. Inflation during the recovery has remained below the Fed's 2 percent target, while of late slumping energy costs and a strong dollar have hindered a rise in prices and wages.

But the Fed believes those are transitory factors, Edelstein said in a note. "The bottom line is that weak inflation, in the Fed's view, is an aberration that will correct in the medium-term. It therefore isn't going to deter the Fed from raising interest rates later this year."

The central bank has kept its benchmark rate near zero for six years since reducing it to a record low in December 2008 when the country was in the grips of the Great Recession and the Fed was struggling to keep the banking system from collapsing during the financial crisis.

The Fed's policy statement last month was approved on a 7-3 vote. The three dissents underscored the deep divisions inside the Fed as it transitions from an extended period of ultra-low rates to a period in which it will start to raise rates.

The dissents included regional bank presidents Richard Fisher of the Dallas Fed, Charles Plosser of the Philadelphia Fed and Narayana Kocherlakota of the Minneapolis Fed.

Fed Chair Janet Yellen said at a news conference following the December meeting that she believed it was unlikely that the Fed would begin raising rates "for at least the next couple of meetings," a comment that was seen as ruling out rate hikes at the January and March sessions.

In October, the Fed ended its third round of bond buying, which had been intended to keep down long-term borrowing rates. Those bond purchases have boosted the Fed's investment holdings to close to $4.5 trillion - more than four times the level when the financial crisis hit in the fall of 2008.