Fed Officials Divided Over June Liftoff, FOMC Minutes Show

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Fed Minutes Show Officials Were Divided Over June Liftoff

Federal Reserve policy makers last month were split over whether they would raise interest rates in June, a debate that occurred before recent disappointing payroll figures, minutes of their most recent policy meeting showed.

“Several participants judged that the economic data and outlook were likely to warrant beginning normalization at the June meeting,” according to minutes of the March 17-18 Federal Open Market Committee session released Wednesday in Washington.

Others said energy-price declines and a stronger dollar would continue to curb inflation, arguing for a rate increase later in the year. A couple said the economy probably wouldn’t be ready for tighter policy until 2016.

In March, the FOMC dropped a pledge to be “patient” as it considered the first rate rise since 2006, while also reducing forecasts for the path of increases. Fed Chair Janet Yellen has since said borrowing costs would probably be raised gradually, and a weak payrolls report released last week has added to caution among officials.

“They are data dependent, and the data has now turned in the opposite direction,” Diane Swonk, chief economist at Mesirow Financial Holdings Inc. in Chicago, said in a Bloomberg Television interview. “We now need to see catchup before the Fed actually lifts rates.”

Stocks Climb

Stocks initially erased gains following the report, then resumed their climb. The Standard & Poor’s 500 Index was up 0.2 percent to 2,080.07 at 3:51 p.m. in New York. The yield on the 10-year Treasury note was up one basis point, or 0.01 percentage point, to 1.90 percent.

The FOMC in March said job gains had been “strong” and labor-market conditions had “improved further,” even as growth moderated. Since then, data have suggested the economy cooled more, partly as a result of unusually harsh winter weather and a stronger dollar.

Payrolls climbed by 126,000 in March, breaking a yearlong string of monthly gains exceeding 200,000, according to a Labor Department report on April 3.

Recent comments by top Fed officials suggest the central bank is in no hurry to tighten, and increases will be gradual once they do begin.

“There are strong arguments for being a little on the late side,” in raising rates, New York Fed President William C. Dudley said earlier Wednesday.

Fed Credibility

A premature increase could force policy makers to reverse course and cut the benchmark rate back to zero, damaging the central bank’s credibility, he said.

The minutes shed some light on what would make officials “reasonably confident” that inflation will move back up toward their 2 percent goal, one of the conditions for a rate increase.

“Further improvement in the labor market, a stabilization of energy prices and a leveling out of the foreign-exchange value of the dollar were all seen as helpful in establishing confidence that inflation would turn up,” the minutes showed.

Prices as measured by the Fed’s preferred gauge rose just 0.3 percent in February from a year earlier, and inflation has languished below the central bank’s 2 percent goal for 34 straight months.

The dollar’s strength featured prominently in the committee’s discussion. The Bloomberg Dollar Spot Index has advanced about 18 percent in the past year, keeping downward pressure on inflation by lowering the cost of imported goods.

“Several participants noted that the dollar’s further appreciation over the inter-meeting period was likely to restrain U.S. net exports and economic growth for a time,” the minutes showed.

Dollar Concern

“There was definitely a bit more concern about the strength of the dollar than we’ve heard in the past,” said Michael Hanson, senior U.S. economist at Bank of America in New York.

The minutes doesn’t name participants or give precise figures for the number of officials holding a particular view.

The committee took note of “a number of risks to the international economic outlook, including the slowdown in growth in China, fiscal and financial problems in Greece, and geopolitical tensions.” That reiterated concern over those two countries mentioned by officials in their meeting in January.

More than half of Fed officials lowered their estimates of the longer-run normal rate of unemployment, according to the minutes. As a result, the central tendency of these estimates -- which exclude the three highest and three lowest forecasts -- shifted down to 5 percent to 5.2 percent.

Even with those adjustments, “a few” participants indicated they would further cut their estimates if wages continued to show only modest growth.

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