Fed raises likelihood of a June interest rate hike

May 18, 2016

An interest rate hike in June is likely if the economy keeps improving, the Federal Reserve made clear Wednesday in a signal that caught many Fed watchers off guard.

The minutes of their most recent meeting in late April show that officials widely felt it would be appropriate to raise rates at their June 14-15 meeting as long as hiring and economic growth further strengthened and inflation showed signs of accelerating.

At that meeting, the Fed voted 9-1 to keep interest rates unchanged while noting that threats from the global slowdown had eased.

The Fed boosted its key rate by a quarter-point in December and indicated at the time that it expected to move rates up four times in 2016. But financial market turbulence in January, sparked by an unexpectedly sharply slowdown in China and weakness in the U.S. economy during the first three months of this year, has kept the Fed on the sidelines.

It passed up chances to boost rates at its meetings in January, March and April. And in March, it signaled that it was reducing from four to two the number of rate hikes it expects to make this year.

Stocks turned lower and bond yields rose after the minutes were released at 2 p.m. as investors responded to the increased likelihood that the Fed could raise rates at its next meeting.

The minutes said that some meeting participants did express concerns that "incoming information might not provide sufficiently clear signals to determine by mid-June whether" a rate hike was warranted. But this view was balanced against the belief of other Fed officials who "expressed more confidence that the incoming data would prove broadly consistent" with a June rate hike.

The minutes showed that even at the April meeting, Fed officials were encouraged by developments in the U.S. economy and financial markets with several participants believing that the risks to the economic outlook were now "roughly balanced."

The Fed had last expressed the view that risks were balanced in December when it hiked rates for the first time in nearly a decade. But it removed this assessment from the statements issued after the January, March and April meetings.

While many private economists had believed the Fed would remain on hold at June meeting, recent developments have called that view into question.

Various barometers show the economy has been recovering in the second quarter after nearly stalling out in the first three months of the year, a time when overall growth, as measured by the gross domestic product, slowed to an annual rate of just 0.5 percent, the weakest showing in two years. Analysts believe growth in the current quarter will accelerate to around 2 percent or better.

In addition, inflation, which has been running below the Fed's 2 percent target for four years, has shown signs of accelerating as energy prices rebound from a steep drop at the beginning of the year. The government reported Tuesday that the consumer price index jumped 0.4 percent in April, reflecting higher energy costs.

In remarks this week, three Fed officials raised the prospects of a June rate hike.

John Williams, president of the Fed's San Francisco regional bank, called June a "live" meeting. Atlanta Fed President Dennis Lockhart said of the possibility of a June hike, "I wouldn't take it off the table."

Robert Kaplan, president of the Fed's Dallas regional bank, said on Tuesday that "in the not-too-distant future" the Fed should be raising rates. Speaking in Midland, Texas, Kaplan said he may advocate for a move in June or July.


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