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, in June.
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 in June 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 in April 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. "The markets are certainly more pessimistic than I am," 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, gradually reducing those incentives, as the economy gains strength.
The April account, published after the standard three-week delay, 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.
But the account said some Fed officials were frustrated by the conclusions investors had drawn. "Some participants were concerned that market participants may not have properly assessed the likelihood of an increase in the target range at the June meeting," it said. As a corrective, it offered an account of how the Fed would decide whether to raise rates in June.
The Fed carefully distinguishes in its meeting accounts between the broader group of 17 officials who attend policy meetings and the 10 of those officials who hold votes.
Narayana Kocherlakota, a professor of economics at the University of Rochester who stepped down as president of the Federal Reserve Bank of Minneapolis at the end of last year, noted that those 10 "members" were described in the minutes as more tempered in their assessment of the chances of a June hike.
"Members generally judged it appropriate to leave their policy options open," the account said.
William C. Dudley, president of the Federal Reserve Bank of New York and one of those voting members, said in a recent interview that it was reasonable to expect the Fed to raise rates twice more this year, but that the decision would depend on the strength of the data.
"We should continue to see tightening of the US labour market, probably a gradual acceleration in wages as the labour market gets tighter," Mr. Dudley said. "And if that's how the economy plays out, then I think we're going to see further moves by the Fed to gradually normalize interest rates."
The labour market has gained strength in recent months, while reported economic growth has been relatively weak. Economists have puzzled over which to take more seriously, but the account said most Fed officials had concluded the economy was doing better than the data suggested.
They judged "the apparent softness in spending in the first quarter was unlikely to persist," it said.
Among the reasons: strong job growth, rising incomes and looser financial conditions.
Another key question is whether the supply of workers has receded to a normal level, suggesting that continued economic growth will begin to put upward pressure on wages and prices. Officials were described as divided on this issue; some noted evidence that people who had left the labour force were returning in significant numbers, seeing better chances of finding work.
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.
©2016 The New York Times News Service
