Fed looks Past June for First Rate Rise
Purchasing homes in Vernal Utah – Interest Rate Increase?
Federal Reserve officials at their April policy meeting said in the most explicit terms yetthat they are unlikely to start raising short-term interest rates in June, as seemed possible when 2015 began.
Officials have been saying they won’t begin lifting their federal funds rate from near zero until they see more improvement in the labor market and are confident inflation will rise toward their 2% target. Several of them started the year thinking they might reach that point by midyear.
But by last month, after watching the economy stumble through the winter, many at the April 28-29 meeting were doubtful those criteria for a rate increase would be met, according to minutes of the meeting released Wednesday.
Many officials “thought it unlikely that the data available in June would provide sufficient confirmation that the conditions for raising the target range for the federal funds rate had been satisfied, although they generally did not rule out this possibility,” the minutes said.
While the minutes suggest a rate increase isn’t completely off the table, only a few Fed officials thought they would have enough confidence to begin raising interest rates at the June 16-17 meeting.
Market participants are increasingly looking toward September—or beyond—for a Fed rate increase.
RobertoPerli, central bank analyst at investment advisory Cornerstone Macro, said the
risks of a Fed move even later than September have increased since the April meeting because of the disappointing economic data.
“Three more weeks of little growth may have made at least some [Fed officials] more cautious,” he said.
Indeed, since the April meeting, Fed officials have seen a mixed bag of economic data. The Commerce Department reported last month that the economy grew at a meager 0.2% annual rate in the first quarter and many analysts expect that estimate to be revised down.
Though job growth picked up in April and the unemployment rate declined to 5.4%, several indicators of economic output—including industrial production and retail sales—have been disappointing.
In the process, many private forecasters have revised down their estimates for second quarter growth.
The confounding data point to a disconnect that puzzles some Fed officials. Though the economy is generating jobs and income for workers, it isn’t translating into much pickup in spending or investment. And inflation has been below the central bank’s 2% target for nearly three years.
The Fed moved short-term rates to near zero in December 2008 and has kept them there since.
With the unemployment rate falling, officials believe the moment is approaching when slack will be squeezed out of the economy and inflation pressures will start to build.
“I believe that the appropriate time has not yet arrived, but I expect that conditions may warrant an increase in the federal funds rate target sometime this year,” Fed Chairwoman Janet Yellen said in late March, after that month’s meeting but before the April gathering.
Still, while they acknowledged their uncertainty had risen after the first-quarter stumble, the officials and Fed staff struck a generally upbeat stance about the medium-run outlook, the minutes showed. The staff revised up the growth outlook because the dollar hadweakened—which could helpexports—and interest rates were expected to stay low
longer than previously expected.
Moreover, many officials wrote off the first quarter to temporary factors.
“The severe winter weather in some regions had reportedly weighed on economic activity, and the labor dispute at West Coast ports temporarily disrupted some supply chains,” the minutes said.
Officials also pointed to statistical quirks in government data that have resulted for several years in weak first-quarter growth readings and stronger figures later in the year. “This tendency supported the expectation that economic growth would return to a moderate pace over the rest of this year,” the minutes said.
Still, longer-term factors are starting to weigh on Fed officials’ thinking and creating seeds of doubt in their outlook.
“A number of participants suggested that the damping effects of the earlier appreciation of the dollar on net exports or of the earlier decline in oil prices on firms’ investment spending might be larger and longer-lasting than previously anticipated,” the minutes said.
Other concerns are creeping in.
A discussion about how high rates might go in the long-run led some officials to ask whether the Fed should do more now to stimulate the economy and wait longer before raising interest rates.
Another discussion about market conditions led some to worry about how Fed rate increases might affect bond markets. In 2013, when Fed officials started talking about winding down a bond-purchase program, bond yields rose sharply—pushing up mortgage rates and stirring a slowdown in the housing market.
Some Fed officials worried at the April meeting of a repeat of that event, known in markets as the 2013 “taper tantrum.” Though the Fed ultimately ended the bond-purchase program without more turbulence in markets, Fed officials worry that an interest-rate move could lead to more bond market volatility that damages the expansion they’re hoping has taken hold.