Federal Reserve officials raised the possibility they might raise rates sooner than anticipated, as they neared agreement on an exit strategy, according to minutes of their July meeting.
“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 minutes, released today in Washington, read.
Fed Chair Janet Yellen has committed to use monetary policy to strengthen the labor market so long as inflation remains in check. “Many participants” at the meeting still also saw “a larger gap between current labor market conditions and those consistent with their assessments of normal levels of labor utilization,” the minutes showed.
The release of the minutes set the stage for Yellen’s speech on labor markets Aug. 22 at the Kansas City Fed’s annual symposium in Jackson Hole, Wyoming. She has focused on low labor-force participation, weak wage growth and elevated levels of long-term unemployment to emphasize continued slack.
“She’s going to make the case that while some data points are better, universally all the data points aren’t strong, and because we’re not seeing a surge in inflation that gives the Fed a little more leeway to be cautious,” Phil Orlando, chief equity strategist at Pittsburgh-based Federated Investors Inc., said in an interview.
Stocks resumed their advance after declining following the release of the minutes. The Standard and Poor’s 500 Index added 0.3 percent to 1,986.50 at 4 p.m. in New York. The yield on the 10-year Treasury note was up three basis points, or 0.03 percentage point, to 2.43 percent.
The central bank’s post-meeting statement last month reflected Yellen’s view of the job market, highlighting “significant underutilization of labor resources” even as unemployment declines.
Still, the minutes showed policy makers anticipating further labor-market strength.
“Many members noted, however, that the characterization of labor market underutilization might have to change before long, particularly if progress in the labor market continued to be faster than anticipated,” the minutes said.
Fed officials, discussing their strategy for eventual “normalization” of policy, expressed a desire to keep the federal funds rate as the key policy rate, targeting a range of 25 basis points “at the time of liftoff and for some time thereafter,” according to the minutes.
They would use the rate of interest on excess reserves as the “primary tool used to move the federal funds rate into its target range” while “temporary use” of its reverse repurchase facility, which it uses to borrow cash overnight from money-market mutual funds and others, would help set the floor.
However, Fed officials “generally agreed” that the reverse repurchase facility should be “phased out when it is no longer needed for that purpose,” and that the balance sheet “should be reduced to the smallest level consistent with efficient implementation of monetary policy and should consist primarily of Treasury securities in order to minimize the effect” of the Fed’s portfolio holdings on credit allocation across different sectors of the economy.
Most participants advocated continuing to reinvest maturing bonds until some time after the first increase in the federal funds rate, while some said “it could be helpful to retain the option to sell some assets” instead of letting them run off the balance sheet as they mature.
There was no discussion of the timing of a rate increase in the minutes. Fed officials have forecast that it would occur some time next year. The central bank has kept its benchmark rate near zero since December 2008.
The Federal Open Market Committee in July continued cutting the monthly pace of asset purchases, reducing it by $10 billion for a sixth straight meeting, to $25 billion. Bond buying has boosted the central bank’s balance sheet to a record $4.43 trillion.
Weak wage growth and low inflation have given the Fed room to keep interest rates near zero in a bid to bolster further progress in the labor market. Average hourly earnings rose 2 percent in July from the year before, matching the mean increase over the past five years and down from 3.1 percent in the year ended December 2007, Labor Department data showed in the latest employment report.
Employers added more than 200,000 jobs for a sixth straight month in July, the longest such period since 1997, according to the report. The jobless rate climbed to 6.2 percent as more people entered the labor force in search of work, after falling 0.6 percentage point during the first half of the year.
Fed officials also said in the statement that “economic activity rebounded in the second quarter” and “the likelihood of inflation running persistently below 2 percent has diminished somewhat.”
The Fed’s preferred inflation gauge, the personal consumption expenditures index, rose 1.6 percent in June from a year earlier. The increase was just 1 percent in February.
Another measure, the consumer price index, rose 2 percent in July from a year earlier, following a 2.1 percent advance the prior month, according to Labor Department figures released yesterday.