Fed minutes signal readiness for December rate increase

The Federal Reserve, setting aside its habitual reticence, is issuing increasingly explicit warnings that it is likely to start raising its benchmark interest rate in December.

Most Fed officials say they think the economy will be ready for higher rates by year's end, the Fed revealed on Wednesday in an official account of its October policy-making meeting.

"While no decision had been made, it may well become appropriate to initiate the normalisation process at the next meeting," the October meeting minutes said in the latest signal of the Fed's intentions.

The account cautioned that the Fed might still be deterred by "unanticipated shocks" or disappointing economic data, but such warnings sound increasingly pro forma. After the strong October jobs report, investors and analysts are convinced that a rate increase is imminent. Borrowing costs are rising, and Fed officials are encouraging the solidification of expectations.

"I am comfortable with moving off zero soon, conditioned on no marked deterioration in economic conditions," Dennis P Lockhart, the Federal Reserve Bank of Atlanta president and a reliable monetary policy bellwether, said on Wednesday at a conference in New York.

The Fed has held short-term interest rates near zero since December 2008 as the major element in its campaign to stimulate economic growth by encouraging borrowing and risk-taking. By raising interest rates, it will reduce that encouragement, although Fed officials have emphasised that they plan to raise rates gradually because the economy remains relatively weak.

"We continue to expect a December liftoff," Michael Dolega, senior economist at TD Bank, wrote in an analysis after the release of the minutes on Wednesday. "Having said that, we expect the Fed to increasingly emphasise the gradual, or even glacial, pace of hikes thereafter, likely assuaging fears and containing any unwarranted tightening in financial markets."

Fed officials at the October meeting expressed confidence in the health of the domestic economy despite disappointing job growth in August and September. The ranks of people unsuccessfully seeking work have gradually dwindled, and most Fed officials saw labour market conditions as nearly normal. Additionally, most continued to predict that inflation would rebound after several years of sluggishness.

"Participants were encouraged by the solid pace of consumption growth in the third quarter and generally expected consumer spending to rise moderately going forward," the account said.

It also noted that markets had settled after a period of volatility that contributed to the Fed's decision not to raise rates in September. "The US financial system appeared to have weathered the turbulence in global financial markets without any sign of systemic stress," it said.

The Fed said in a statement after the October meeting that it would consider raising rates in December. Since then, the data has remained strong - including the reported addition of 271,000 jobs in October - and Fed officials have sounded increasingly confident.

The minutes published on Wednesday appeared to have little impact on financial markets, which in recent weeks had already raised the odds of a December rate increase to about 66 per cent.

William C Dudley, the president of the Federal Reserve Bank of New York, who has emphasised the importance of preparing financial markets for liftoff, said on Wednesday before the publication of the minutes that it appeared investors were ready for the Fed to start raising rates.

"The good news is that this is probably the most well-advertised, discussed, thought-about, mused-over prospect of beginning a normalisation of monetary policy in history," said Dudley, who spoke at the same conference as Lockhart. "I'm not looking for a big reaction."

Some officials still argued at the Fed's October meeting that it was too soon to start raising rates. Their case focused less on current conditions than on the risk the economy would suffer a setback.

These officials warned that a global downturn could cause "a potential loss of momentum in the economy and the associated possibility that inflation might fail to increase as expected."

Others Fed officials, however, counseled against delay. They argued that the Fed would only confuse financial markets by delaying, and it risked undermining economic confidence.

©2015 The New York Times News Service