Fed Minutes Likely to Reveal Debate on June, July Rate Hike

Helicopter Money's Coming, Which Bank Does It First?
  • Watch for discussion on the balance of risks to the outlook
  • Officials want hikes on the table despite investor skepticism

The Federal Reserve will shed more light this week on the risks of either raising interest rates amid global uncertainty or leaving them on hold again as the U.S. economic outlook improves.

Minutes of the Federal Open Market Committee’s April 26-27 meeting will be released at 2 p.m. on Wednesday. Several regional Fed presidents said last week that a move could be possible in June or July, though there’s been no recent public comment from Chair Janet Yellen or her number two, Stanley Fischer. Yellen will speak at Harvard University on May 27 and Fischer delivers remarks Thursday in New York.

Investors see less than a 23 percent chance the Fed will hike at either of its next two meetings, according to pricing in federal funds futures. The minutes could show how many policy makers wanted to get on with rate increases, versus those arguing for caution. It may also unpack the debate around the risks to the U.S. and global economic outlook.

“The April FOMC statement was an attempt by the committee to balance out the odds of a June move a little bit,” said Stephen Stanley, chief economist at Amherst Pierpont Securities LLC in New York. “They weren’t ready to say they wanted to go in June, but they felt like the odds priced in June were too low.”

Global Outlook

At the conclusion of its April 26-27 meeting in Washington, the FOMC left its benchmark rate unchanged, but updated its policy statement by removing a reference to "global economic and financial developments" as an ongoing risk. There was no press conference following that meeting.

The FOMC has held its target range for the federal funds rate unchanged at 0.25 percent to 0.5 percent since lifting it in December for the first time in nearly a decade. Officials in March forecast they would raise rates twice this year but investors see only one move.

One reason for this skepticism is the mixed readings on the U.S. economy so far in 2016, with ups and downs in consumer spending despite steady job creation while the Fed’s preferred gauge for inflation remains under its 2 percent target, though it may be beginning to build. Consumer prices, which the Fed doesn’t target, increased 0.4 percent in April compared to the month before, Labor Department data showed on Tuesday, registering the largest gain in three years.

Financial markets have also been volatile, especially in the first three months of the year, as global growth forecasts were cut.

Brexit Risk

Fed officials next gather on June 14-15, a little more than a week before Britain holds a referendum on European Union membership. A vote on June 23 for the U.K. to leave could renew financial market tensions.

In its April statement, the FOMC also stopped short of offering an assessment of the balance of risks to the outlook, an ongoing feature of post-meeting announcements that was ditched in January as global economic uncertainties increased.

“What we may receive is just more color on the decision not to put in a balance-of-risks assessment,” said Dean Maki, chief economist at Point72 Asset Management LP in Stamford, Connecticut. It could be that there was too much disagreement on the likely persistence of the apparent slowdown in the first quarter, or concern about sparking market turmoil by sending a strong signal about imminent rate hikes, he said.

Calmer Markets

The minutes will probably show that officials were relieved by calmer markets in recent months, which have led to a more-supportive financial backdrop. Fed Governor Lael Brainard called the development “welcome” in a May 10 Bloomberg interview, while adding the caveat that “global risks could re-emerge for a variety of reasons.”

Still, officials didn’t have a very clear picture of the domestic economy when they met in April, said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York.

“How troubled they were by growth, or that they were expecting weak growth not to persist -- to the extent there is uncertainty there, it would make them less likely to move,” he said.

Recent reports have showed that the slowdown in the first quarter doesn’t seem to be carrying over to the second. Advance estimates of retail sales were strong in April and February and March sales were revised up, according to data released by the Commerce Department on May 13 in Washington.

U.S. unemployment is holding steady at 5 percent, and the Fed’s preferred measure of inflation has been under its 2 percent target since 2012.

“Domestically things are just sort of OK, and it certainly doesn’t feel like the domestic situation should be causing any urgency,” said Aneta Markowska, chief U.S. economist at Societe Generale SA in New York. “I don’t think a June hike is on the table. The markets are just not priced for it.”

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