Fed's Cautious Approach on April Rate Hike Raises Stakes for June

Fed Policy Makers Debated an April Rate Hike

Federal Reserve policy makers last month debated an April interest-rate hike, with several officials leaning against such a move because it would send the wrong signal and others saying it might be warranted.

“Several expressed the view that a cautious approach to raising rates would be prudent or noted their concern that raising the target range as soon as April would signal a sense of urgency they did not think appropriate,” minutes of the Federal Open Market Committee’s March 15-16 meeting released Wednesday in Washington said.

The debate, by flagging a potential April rate increase that’s nevertheless unlikely, may have the result of adding more focus to the June session. It also shows the FOMC is prepared to move in a meeting, if necessary, without a scheduled press conference by Fed Chair Janet Yellen.

U.S. central bankers, who left the benchmark interest rate unchanged in March in a range of 0.25 percent to 0.5 percent, discussed the relative health of the American economy, which contrasted against persistent global risks. They worried that slowing world growth could reduce corporate investment plans and restrain U.S. exports. Some officials argued that the U.S. was at or near full employment with inflation starting to rise.

“In contrast, some other participants indicated that an increase” in the federal funds rate target range at the April 26-27 meeting “might well be warranted” if economic data came in as expected, the minutes said.

The March meeting marked an evolution in the Fed’s policy approach as U.S. central bankers gave more weight to the impact of slowing growth abroad on their outlook.

Global Risks

“Many participants expressed a view that the global economic and financial situation still posed appreciable downside risks to the domestic economic outlook,” the minutes said. Data relevant to the Fed’s thinking “include not only domestic economic releases, but also information about developments abroad and changes in financial conditions.”

While Fed governors and regional-bank presidents revised their interest-rate forecasts to show two quarter-point increases this year instead of four, according to the median estimate, they changed their three-year projections for growth, unemployment and inflation only slightly.

Yellen explained in her press conference following the meeting that interest rates had to rise more slowly to offset the “somewhat softer pace” of economic expansion outside the U.S.

Many developed economies find themselves struggling with slow growth, too-low inflation and policy rates that are near, at or slightly below zero. While there has been no formal policy cooperation, the Fed and other central banks are collectively taking more steps to support expansion given the fragile global context.

Sustained Headwinds

“A number” of Fed officials determined that the headwinds restraining growth were likely to “subside only slowly,” the minutes said.

Fed officials met as financial markets were recovering from the depths of a selloff earlier in 2016 that rattled global leaders and boosted perceptions of recession risk in the U.S.

The unemployment rate, at 5 percent in March, is near the Fed’s definition of longer-run full employment, and some inflation indicators are starting to rise.

The personal consumption expenditures price index, minus food and energy, rose 1.7 percent for the year ending February. The FOMC targets inflation of 2 percent, including all items.

Yellen said in a March 29 speech in New York that she considered it appropriate for the committee to “proceed cautiously in adjusting policy” given the downside risks to the global outlook and the proximity of the zero boundary on interest rates.

The minutes echoed those remarks, noting the FOMC had room to raise rates if officials were surprised by the economy’s strength, while having less room to ease if growth softened.

“This asymmetry made it prudent to wait for additional information regarding the underlying strength of economic activity and prospects for inflation before taking another step to reduce policy accommodation,” the minutes said.

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