Fed Minutes Show Rate Hike Momentum as Next Meeting Looms
America’s second interest rate hike in a decade could be right around the corner, as officials at the Federal Reserve appear to be in disagreement over the correct time for a boost.
Minutes from the Federal Open Market Committee‘s July meeting in Washington – at which central bank leaders ultimately passed on raising the country’s benchmark interest rate – were published Wednesday. The document indicated that “some” of those at the meeting “judged that another increase in the federal funds rate was or would soon be warranted, with a couple of them advocating an increase at this meeting.”
Federal Reserve Bank of Kansas City President Esther George even dissented from her colleagues’ decision to stick with the status quo, voting against kicking the rate hike can down the road.
“Ms. George dissented because she believed that a 25-basis point increase in the target range for the federal funds rate was appropriate at this meeting,” the minutes said.
That’s big news for officials at the Fed, who throughout America’s ongoing recovery have been notoriously dovish when it’s come to adjusting monetary policy. The minutes suggest a notable portion of Fed Chair Janet Yellen’s inner circle is more vocally advocating for a return to higher interest rates after spending the last several years at depressed levels.
“The Fed minutes today show officials are torn on whether solid job gains are enough to bring a rate hike in large part due to a lack of visible inflation pressures,” Tara Sinclair, chief economist for job site Indeed, said in a statement Wednesday.
To that end, the minutes pointed to a U.S. labor market that “generally improved in June,” with overall employment increasing “briskly” off the back of the month’s 292,000 newly created jobs.
But upward pricing pressures remained relatively subdued in the year’s second quarter, and officials noted that “consumer price inflation continued to run below the committee’s longer-run objective of 2 percent.”
The Fed is primarily responsible for maximizing employment and maintaining long-term price stability, and progress on those two fronts over the last few years has been noticeably lopsided. Many analysts now believe the labor market is at – or at least close to – maximum employment, but inflation acceleration has been only modest at best.
So in the absence of the economy firing on all cylinders, Fed officials have had a difficult time justifying a rate hike since initially boosting the benchmark rate out of near-zero territory in December.
But now, even in the absence of meaningful inflation progress, momentum for the next increase – tied to satisfaction with the state of the economy – seems to be growing.
“[S]everal expressed concerns that an extended period of low interest rates risked intensifying incentives for investors to reach for yield and could lead to the misallocation of capital and mispricing of risk, with possible adverse consequences for financial stability,” the minutes said.
The minutes didn’t technically offer any true Fed rate hike news, considering the central bank’s July rate decision already had been made public. But the document did offer key insights into monetary policy officials’ economic perspectives. Economic activity, according to the minutes, was believed to have “been expanding at a moderate rate.” Industrial production, which has suffered through months of sluggishness, was said to have risen “modestly.” And consumer spending appeared to have “picked up in the second quarter” following an underwhelming start to the year.
The document additionally dedicated a surprising amount of ink to the United Kingdom’s Brexit vote, but most of the references amounted to good news for the U.S. economy. The relatively extreme market reaction to the vote – which included stock indexes plummeting and investors flocking to safe-haven assets like bonds and Treasuries – “generally reversed” as more time passed, the minutes said, and the U.S. financial system proved “resilient to the Brexit vote.”
In light of the Brexit vote’s impermanent fallout and an overall improvement elsewhere in the economy, Fed officials indicated that “incoming information, on the whole, had lowered the downside risks to the near-term economic outlook,” effectively putting all eyes on September for a potential interest rate hike.
Federal Reserve Bank of New York President William Dudley on Tuesday even told Fox Business Network that he thinks the country is “edging closer towards the point in time where it will be appropriate, I think, to raise interest rates further.”
When asked if a September rate hike was an option, he responded: “Yeah, I think it is possible.”
Given the traditionally dovish nature of the Fed, Dudley’s comments are noteworthy.
Still, last month’s FOMC minutes hadn’t yet seen consumer spending and inflation grind to a halt in recent government reports, and there is still plenty of time for a potential rate hike to be derailed before Fed officials meet in Washington on Sept. 20 and 21.
The CME Group’s FedWatch tool – which indicates how likely investors and market analysts believe a rate hike will be at the Fed’s next meeting – on Wednesday afternoon showed only an 18 percent chance that central bank officials would actually boost rates at their next meeting.
“The September meeting rate hike has undoubtedly been put back on the table because of the impressive labor results, but we continue to feel that the Fed will postpone a rise in the funds rate,” Brett Ewing, owner and chief market strategist at First Franklin Financial Services, wrote in a research note Wednesday. “Historically speaking, the Fed chooses not to raise rates in a presidential election year, but because of the lead Hillary Clinton holds in the polls, we believe markets have been able to begin pricing in the election results. If this holds and Hillary wins in November, we will likely see the Fed raise rates just in time for Christmas.”