Fed Officials in July Saw Rate Rise Conditions Approaching

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Have Conditions for Fed Rate Hike Liftoff Been Met?

Federal Reserve officials said last month that while conditions for raising interest rates were approaching, they need more confidence inflation is moving toward their goal, according to meeting minutes that prompted investors to reduce bets for a September liftoff.

Most meeting participants “judged that the conditions for policy firming had not yet been achieved, but they noted that conditions were approaching that point,” according to minutes of the July 28-29 Federal Open Market Committee session, released Wednesday in Washington.

A headline on the minutes was inadvertently released by Bloomberg 24 minutes before a 2 p.m. embargo set by the Fed.

The details come four weeks before the Fed’s September meeting, when most economists forecast the central bank will raise its benchmark interest rate for the first time since 2006. Policy makers say a decision to raise rates will hinge on continued improvement in the labor market and confidence that inflation will move higher.

“Almost all members” indicated that “they would need to see more evidence that economic growth was sufficiently strong and labor markets conditions had firmed enough for them to feel reasonably confident that inflation would return to the Committee’s longer-run objective over the medium term,” the minutes show. “Members” refers to meeting participants who are voting on FOMC policy this year.

Investors reacted to the news by reducing the probability the Fed would tighten next month to 38 percent, based on pricing of federal funds futures contracts at around 2:30 p.m. in New York, compared to 50 percent earlier Wednesday.

Inflation Confidence

“My immediate reaction is that it should reduce the probability of a September rate hike a little bit,” said Guy LeBas, managing director at Janney Montgomery Scott LLC in Philadelphia. “The biggest point to me is that there’s no evidence of confidence of rising inflation.”

Economists prior to the release of the minutes had been more confident of September liftoff. According to a Bloomberg survey taken Aug. 7-12, 77 percent said the Fed will act next month.

Officials in July left the benchmark federal funds rate near zero and said that it will be appropriate to begin tightening policy once they have seen “some further improvement” in the labor market and are reasonably confident that inflation will move up toward their 2 percent objective. The addition of the modifier “some” was the only change to their language on conditions that would warrant a rate increase.

Labor Market

The labor market has shown continued progress since the FOMC meeting, with U.S. firms adding 215,000 jobs in July compared with the year-to-date monthly average of 211,000.

Inflation, by contrast, has remained subdued. The Fed’s preferred gauge hasn’t been above the committee’s 2 percent goal since April 2012 and rose 0.3 percent in the year through June. Another inflation measure, the consumer price index, rose less than forecast in July, a government report showed Wednesday.

The July minutes showed Fed policy makers raising questions about what it would take to get inflation back to their target. Rising demand for labor “still appeared not to have led to a broad-based firming of wage increases,” the minutes said.

“It was noted that considerable uncertainty remained about when wages might begin to accelerate and whether that development might translate into increased price inflation,” the minutes said.

Still, “most” officials expected that downward pressure on inflation from declines in energy prices and a stronger dollar “would prove to be temporary.”

Stronger Dollar

A 30 percent plunge in oil since its closing peak in June is holding inflation down, along with a slowdown in China that is reducing demand for metals and other commodities. A stronger dollar is also keeping inflation at bay by reducing prices of imported goods.

Meeting participants “generally viewed the risks to the outlook for domestic economic activity and the labor market as nearly balanced,” according to the minutes released Wednesday, although many continued to see some downside risks arising from economic and financial developments abroad.

The People’s Bank of China devalued the yuan last week, a move that spurred speculation that the nation’s economy may be more sluggish than expected. Weaker global growth could hurt the U.S. economy by denting demand for its exports.

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