Fed Officials Split in July on Whether Rate Hike Needed Soon

Fed Officials Divided Over Need for a Rate Hike
  • While some saw time for increase close, others wanted to wait
  • Minutes omit reference to timing of future interest-rate hike

Federal Reserve officials were divided in July over the urgency to raise interest rates again, with some preferring to wait because inflation remained benign and others wanting to go soon as the labor market nears full employment.

Such divergence in views, as shown in minutes of the central bank’s July 26-27 meeting issued Wednesday, means officials are likely to need more concrete evidence that inflation is picking up and economic growth is strengthening before deciding that an increase in borrowing costs is justified. Investors will listen closely for additional clues on timing when Fed Chair Janet Yellen speaks Aug. 26 at an annual symposium hosted by the Kansas City Fed in Jackson Hole, Wyoming. 

“Several suggested that the committee would likely have ample time to react if inflation rose more quickly than they currently anticipated, and they preferred to defer another increase in the federal funds rate until they were more confident that inflation was moving closer to 2 percent on a sustained basis,” according to the records of the policy meeting, released in Washington.

“Some other participants viewed recent economic developments as indicating that labor market conditions were at or close to those consistent with maximum employment and expected that the recent progress in reaching the committee’s inflation objective would continue, even with further steps to gradually remove monetary policy accommodation,” the minutes also showed.

Explicit Timing

The report contained no explicit reference to the timing of the next potential interest-rate increase, beyond noting that a “couple” of officials were advocating for one in July. Some voting members “anticipated that economic conditions would soon warrant taking another step in removing policy accommodation,” the minutes said.

“There certainly is a lack of consensus,” said Millan Mulraine, deputy head of U.S. research and strategy at TD Securities in New York. “For the Fed to move there has to be a much broader consensus than we see right now.”

At its July meeting, the Federal Open Market Committee left the benchmark interest rate in a range of 0.25 percent to 0.5 percent while noting that “near-term risks to the economic outlook have diminished” and that June’s strong job gains followed a weak May.

Longer Term

The minutes expanded on those views to show that some policy makers saw developments including the U.K.’s vote to leave the European Union as imparting longer-term uncertainty about the outlook for global growth. In addition, several officials were concerned that U.S. job gains would again slow, which would make the case for raising interest rates “less compelling.”

A number of Fed policy makers have suggested in public comments since the last meeting that it will probably still be appropriate to raise interest rates at least once this year, with some indicating a move could come as soon as the FOMC’s Sept. 20-21 gathering.

Investors put the probability of a rate increase this year at roughly 50 percent, according to the prices of federal funds futures contracts. Such odds were down slightly on Wednesday from the previous day.

New York Fed President William Dudley said Tuesday during an interview on Fox Business Network that the U.S. central bank is “edging closer” to another hike and that “the market is complacent” about the amount of tightening that will be needed over the next year or so.

Rates Steady

The FOMC has left rates unchanged since voting in December to raise them from near-zero levels, marking the first increase in nearly a decade. Concerns about the prospects for global economic growth, sagging inflation expectations, and mixed readings on the U.S. economy have kept them sidelined.

“Members generally agreed that, before taking another step in removing monetary accommodation, it was prudent to accumulate more data in order to gauge the underlying momentum in the labor market and economic activity,” the minutes also showed.

St. Louis Fed President James Bullard said Wednesday that the central bank should be patient in raising interest rates with economic growth low.

“I like to move on good news about the economy,” Bullard said to reporters after a lecture at Washington University in St. Louis. “We have had some good jobs reports here but on the other hand GDP growth is only 1.2 percent year over year, inflation is still below target, inflation expectations are low.”

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