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When Federal Reserve policy makers met in late July, a brighter picture of the U.S. labor market had emerged, and the U.K. vote to leave the European Union passed without much damage in financial markets.
The most notable change to the Federal Open Market Committee’s statement after the July 26-27 gathering was a reassuring observation that "near-term risks to the economic outlook have diminished." Still, a warning of a looming interest-rate increase wasn’t delivered.
Minutes of that meeting, to be released Wednesday, may help explain why Fed officials stood pat without signaling the timing of their next move. While the short-term picture looked rosier, mounting uncertainties about longer-run issues such as slower potential growth -- discussed at length at the FOMC meeting in June -- may have continued to temper the urge to tighten.
“There still is a whole lot of uncertainty regarding what is likely to transpire over the medium term and the longer term,” said Millan Mulraine, deputy head of U.S. research and strategy at TD Securities in New York. “That speaks for itself in terms of where the monetary policy stance is at the moment -- I think it’s clearly where it was in June, which is, we don’t know where things are heading, so we will sit on our hands for now.”
Fed Chair Janet Yellen didn’t have a scheduled press conference afterward to elaborate on the statement. She’s set to speak at the Kansas City Fed’s annual symposium in Jackson Hole, Wyoming, on Aug. 26. The next FOMC meeting is Sept. 20-21, with a Yellen briefing scheduled to follow.
Since the July meeting, public comments from even those Fed officials among the most cautious on the committee -- such as New York Fed President William Dudley and Chicago’s Charles Evans -- suggest there is still broad agreement that a rate increase may be appropriate later this year.
On Tuesday, Dudley told Fox Business Network that interest rates were “too low” and a rate hike in September is “possible,” adding that “the market is complacent about the need for gradually snugging up short-term interest rates over the next year or so.”
Investors see the chances of a hike by next month as only about one in five, according to the prices of federal funds futures contracts.
San Francisco Fed President John Williams and Dallas Fed President Robert Kaplan have also said since the July meeting that a rate hike in 2016 is probably in the cards, with Kaplan saying “September is very much on the table” if economic data to be released between now and then support such a move.
So far, the figures remain mixed.
A Labor Department report released Aug. 5 showed two straight months of strong job creation. In July, employers added 255,000 workers to payrolls, according to the report, following a surge of 292,000 in June -- both of which helped ease concern about a scant 24,000 gain in May. Fed officials will have the benefit of parsing another monthly jobs report before their September meeting.
While the labor market has improved, the Fed’s 2 percent inflation goal has proven more elusive. The price measure preferred by the central bank has been under that target for more than four years, providing ammunition for the more dovish Fed officials to argue that there’s still no rush to hike.
“There may be a little bit of a bigger divide now than there had been before,” said Michael Hanson, senior global economist at Bank of America in New York. “It does feel like there are some members of the committee who still think September is an option, and the minutes will probably reflect that discussion.”