Fed minutes show rate hike back on cards in June

The Fed, which entered the year predicting quarterly rate increases, instead held steady in the first quarter as the global economy weakened and markets swooned. Its benchmark rate remains in a range between 0.25 and 0.5 per cent.
The Fed, which entered the year predicting quarterly rate increases, instead held steady in the first quarter as the global economy weakened and markets swooned. Its benchmark rate remains in a range between 0.25 and 0.5 per cent.PHOTO: REUTERS

Officials keen to push for move but economy has yet to show the strength they want to see

NEW YORK • The Federal Reserve sent a sharp, simple message to financial markets on Wednesday: Pay attention. The Fed is thinking seriously about raising its benchmark interest rate at its next meeting next month.

The unusually frank bulletin was delivered in the official account of the Fed's April meeting, which said explicitly that most officials thought "it likely would be appropriate" to raise rates next month if the economy shows clear signs of a rebound from a weak winter.

That message was sharply at odds with the expectations of investors, who had largely written off a June increase before Wednesday, betting instead that the Fed would leave rates unchanged until later in the year.

Measures calculated from asset prices suggested that investors saw less than a 5 per cent chance of a June increase at the beginning of the week; by the end of Wednesday, that had spiked above 30 per cent.

It remains far from certain, however, that the Fed will move at its meeting on June 14 and 15.

The economy has yet to demonstrate the strength the Fed says it wants to see, and some officials said last month there might not be time to gain the necessary confidence before the June meeting.

Still the account made clear that Fed officials want markets to take the possibility more seriously.

MARKET CUES

The markets are certainly more pessimistic than I am.

MR DENNIS LOCKHART, the president of the Federal Reserve Bank of Atlanta and a bellwether for the Federal Open Market Committee.

"The markets are certainly more pessimistic than I am," Mr Dennis Lockhart, the president of the Federal Reserve Bank of Atlanta and a bellwether for the Federal Open Market Committee, said on Tuesday in Washington.

Two other Fed officials similarly said on Tuesday that they were thinking about a June increase.

The Fed, which entered the year predicting quarterly rate increases, instead held steady in the first quarter as the global economy weakened and markets swooned. Its benchmark rate remains in a range between 0.25 and 0.5 per cent. The Fed is holding rates at historically low levels to support economic growth by encouraging borrowing and risk-taking. It plans to raise rates as the economy gains strength.

The April account showed the Fed was continuing to struggle with communications.

Officials have said repeatedly that they want to get out of the business of telling markets when rates will rise. They want investors to draw inferences from the economic data. They want to move from date dependence to data dependence.

Concerns about the persistence of inflation below the Fed's 2 per cent annual target appear to have diminished somewhat. The April account said that for many Fed officials, "recent developments provided greater confidence that inflation would rise to 2 per cent over the medium term".

Other familiar concerns remained, in particular about the impact of renewed global weakness.

Yet the account portrayed Fed officials as waiting to raise rates largely from an abundance of caution. And it suggested that they did not expect they would be waiting too much longer.

NEW YORK TIMES

A version of this article appeared in the print edition of The Straits Times on May 20, 2016, with the headline 'Fed minutes show rate hike back on cards in June'. Print Edition | Subscribe