Hurdles to Higher Fed Rates Diminish as Job Market Improves

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Kroszner, Blinder, Blankfein on Fed Policy in Two Minutes

The barriers to a Federal Reserve interest-rate increase this year are getting smaller.

The Fed on Wednesday expressed satisfaction with progress toward full employment, and it used one word -- “some” -- to describe the additional gains it wants to see before raising rates.

“They see the economic outlook as generally improving,” said Paul Eitelman, investment strategist for Russell Investments in Seattle. “The hurdle for hiking interest rates is fairly low as long as there is some indication that inflation is going to be stable to higher going forward.”

The Federal Open Market Committee described job gains as “solid,” and it dropped the modifier “somewhat” to describe a decline in labor-market slack. At the same time, policy makers refrained from signaling the likely timing of the first rate increase since 2006, keeping market expectations focused on a move as soon as September.

Stocks extended gains, with the Standard & Poor’s 500 Index climbing 0.7 percent to 2,108.57 as of 4:08 p.m. in New York. Treasuries remained lower, with the 10-year note yielding 2.29 percent, up four basis points, or 0.04 percentage point, from late Tuesday.

With policy makers saying their decisions are “data dependent,” the focus turns to figures on growth, jobs and inflation that will help determine the likely timing of liftoff.

The first report came Thursday with data on gross domestic product. The economy expanded at a 2.3 percent annual rate in the second quarter, confirming Fed Chair Janet Yellen’s view that a slump early in the year was transitory. The first-quarter figure was revised to a gain of 0.6 percent from a previously reported contraction.

Data Talks

“The Fed has said repeatedly they want to allow the data to do the talking,” said Neil Dutta, head of U.S. economics at Renaissance Macro Research LLC. “This leaves the door open to a rate hike in September, and the economic data is in the driver’s seat.”

Fed officials have been heartened by job gains as unemployment fell to a seven-year low of 5.3 percent in June. Monthly increases in non-farm payrolls have averaged 208,000 so far this year.

“They feel like they’ve seen enough, basically, with regard to labor-market developments,” said Stephen Stanley, chief economist at Amherst Pierpont Securities in Stamford, Connecticut and a former Fed economist who predicts a September move. “Obviously they want to see the good news continue, but at this point, I don’t think that’s an impediment to going anymore.”

At the same time, inflation has lingered below the Fed’s goal for three years, with the central bank’s preferred gauge rising just 0.2 percent in May from a year earlier.

Inflation Outlook

In addition to wanting to see “some further improvement” in the labor market before raising rates from zero, officials repeated their second condition: they must be “reasonably confident” inflation will move back to their goal over the medium term.

They also dropped a sentence from their statement saying energy prices appeared to have stabilized. Some economists took that change as a signal of heightened concern over inflation that’s trending lower as oil prices decline.

“It was one step forward and one step back,” said Brian Jacobsen, who helps oversee $250 billion as chief portfolio strategist at Wells Fargo Advantage Funds in Menomonee Falls, Wisconsin. “The Fed only needs to see a little more improvement in the labor market to justify a rate hike, but the recent decline in commodity prices has marginally dinged their confidence in the inflation outlook.”

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