The minutes of the September meeting of the Federal Reserve’s Open Market Committee released Wednesday explained why three Fed board members had dissented from the majority’s “close call” decision to keep rates unchanged. The highly anticipated transcript provides insights into internal and external developments, illustrating the “unusual uncertainty” that policymakers must contend with.

The transcript is an important reminder of how difficult it has become to maintain a high level of conviction about the correct policy in a time of such fluidity in the economic, financial, political and institutional environment.

Here are the main takeaways, including those where there seems to be broad agreement, those where there are differences and ending with what proved to be the missing tiebreaker.

Fed officials agreed that “the labor market has continued to strengthen” and that this is highly likely to remain the case in the period ahead. As a result, economic activity is expected to continue to expand “at a moderate rate.” Policy makers also agreed that external economic conditions, including the aftershocks of the Brexit referendum, were less threatening. In addition, they stated that “global financial conditions had improved somewhat in recent months.” This anchored the view that “near-term risks to the economic outlook” are “roughly balanced.”

When looking at the details of developments in the US labor market, officials correctly noted the need to take a further look at “differential patterns of unemployment across racial and ethnic groups that remained after taking education into account.” This is both warranted and important, especially given the extent to which growth (which has been too low to begin with) has been insufficiently inclusive.

The central bankers also seemed united in acknowledging a phenomenon that is now attracting greater analytical attention in many quarters: “the apparent fall over recent years in the neutral real rate of interest -- or r*.” That is a reference to the “equilibrium” rate -- the federal funds rate that neither stimulates nor restrains growth and stable inflation.

However, even though officials cited contributing factors to the lowering of r*, they are said to have disagreed on the extent and durability of the fall.

This leads us to areas where Fed officials have yet to arrive at a common viewpoint.

They disagreed about the overall looseness remaining in the labor force. Some “judged that the labor market had little or no remaining slack,” while a larger number felt there was more room. The September jobs report, which came out after their meeting, does not help to resolve this difference.

The gaps in perception reflect more than the inherent difficulty of making judgments about the potential for an increase in a labor participation rate that, disappointingly, is still too close to multi-decade lows. There is also genuine uncertainty about today’s process for setting wages, especially in the context of the evolving influence of technology.

Given these differences, it should come as no surprise that “the decision at this meeting was a close call.” After all, the economic considerations are rather balanced. Indeed, as I have argued previously, it is hard to expect a tie-breaking stance to emerge. But this is not to say such a position doesn’t exist. It is just that Fed officials seem hesitant to embrace it openly.

Although the minutes contain some mention of the risk of excessive leverage, as well as the danger from higher savings due to threats to the institutional effectiveness of long-term providers of financial services (such as pensions, endowments and life insurance), Fed officials appear to have shied away from a discussion of how prolonged reliance on ultra-low rates (and negative ones in Europe and Japan) is increasing the threat of future economic and financial instability.

Had officials taken these circumstances into account, an understandably “close call” on economic considerations alone would have turned into an argument to hike interest rates, and could have been a reminder to market participants that this cycle will be unusually shallow, with irregularly paced increases and an endpoint that is far lower than historical averages.

By Mohamed A. El-Erian

Mohamed A. El-Erian is a Bloomberg View columnist. He is the chief economic adviser at Allianz SE and chairman of the President’s Global Development Council. –Ed. 

(Bloomberg)