Federal Reserve officials in June saw the economy moving toward conditions that would support an interest-rate increase, while also expressing concern about weak consumer spending and risks from China and Greece that have since intensified.
Policy makers “saw economic conditions as continuing to approach those consistent with warranting” tighter monetary policy at some point, according to minutes of their June 16-17 meeting released Wednesday in Washington. All but one “indicated that they would need to see more evidence that economic growth was sufficiently strong.”
Stocks and Treasury yields extended declines as the minutes added to concern that turbulence overseas poses risks for the U.S. expansion. Fed officials considering the timing of the first rate increase since 2006 are weighing a domestic economy that has shown improvement since their last meeting against deepening woes in China and the European Union.
“I get a reading of a committee that is very insecure about the state of the economy and unwilling to send a clearer signal about rate hikes,” said Michael Gapen, chief U.S. economist at Barclays Capital Inc. in New York. “The economic activity data has been better, but the risks in the external backdrop have increased.”
The Standard & Poor’s 500 Index was down 1.7 percent to 2,046.68 at the 4 p.m. close of trading in New York. The yield on the 10-year Treasury note fell seven basis points, or 0.07 percentage point, 2.19 percent.
Investors will get further clues on the Fed’s outlook when Chair Janet Yellen speaks on Friday. U.S. central bankers will see two more jobs reports as well as data on retail sales, housing, and inflation before their Sept. 16-17 meeting, when Yellen will hold a press conference. Policy makers also meet July 28-29.
Fed officials in June forecast they would raise rates twice this year, signaling that September is the most likely month for liftoff, while lowering their outlook for subsequent increases.
The minutes of the Federal Open Market Committee showed several officials “mentioned their uncertainty about whether Greece and its official creditors would reach an agreement and about the likely pace of economic growth abroad, particularly in China and other emerging-market economies.”
Separately, Fed Bank of San Francisco President John Williams Wednesday maintained his call for two rate increases this year.
“We will get greater clarity, hopefully, on what’s happening in Greece and the euro area,” by September, Williams, a voting member of the FOMC this year, told reporters after a speech in Los Angeles.
Many committee members last month expected the economy to be near full employment by year-end if growth progressed as they expected. Officials in June expected the unemployment rate to average 5.25 percent in the final three months of the year.
“The strength that we are seeing in the U.S. economy -- a reacceleration in both the consumer and the housing market -- is enough for the U.S. economy to plow through potential contagion from China and Greece,” said Paul Eitelman, investment strategist for North America at Russell Investments in Seattle. “As long as the economic data continue to come through better on a sequential basis, I think the Fed will feel comfortable hiking interest rates in September.”
In June, officials expressed some caution about the economic outlook. Among their concerns were lingering weakness on consumer spending, along with drags on investment and exports resulting from lower energy prices and a stronger dollar.
While the median forecast for the benchmark interest rate this year was unchanged in June, seven of 17 members of the FOMC now project either one rate increase or none in 2015, up from just three in March. The Fed has held the rate near zero since December 2008.
Reports since the June meeting have shown improvements in consumer spending and housing. While payrolls showed further gains, wages stagnated and the labor force declined.
Turbulence in Greece and China poses the risk that the dollar will strengthen further, damping demand for U.S. exports and keeping inflation in check. Consumer-price gains have lingered below the Fed’s 2 percent goal for three years.
The Shanghai Composite Index sank 5.9 percent on Wednesday, extending declines from its June 12 peak to 32 percent. Economists forecast 6.9 percent growth in China this year, the slowest in a quarter century.
The minutes also included an “implementation note” that would describe how policy tools would be adjusted to set the benchmark rate at the level intended by the FOMC. In raising the fed funds rate, the central bank will also deploy overnight reverse repurchase agreements to establish a floor under the rate, and adjust the interest it pays on excess bank reserves on deposit within the Fed system.