Many in the financial world were expecting an interest rate hike in June, but it seems that the Federal Reserve Board may have other plans.
The New York Times had this story by Binyamin Appelbaum about what the Fed is thinking about in terms of raising rates:
The Federal Reserve is looking increasingly unlikely to start raising its benchmark interest rate in June.
A number of Fed officials expressed doubts about beginning in June during the March meeting of the Fed’s policy-making committee; according to an account the central bank published on Wednesday. And those doubts have since been reinforced by a disappointing estimate of March job growth, and by the continued sluggishness of inflation.
“Data has very much surprised to the downside,” William C. Dudley, the influential president of the Federal Reserve Bank of New York, told Reuters on Wednesday. “It’d be reasonable to think that the timing of the Fed’s first rate hike might be a little further off in time.”
The Fed has held short-term interest rates near zero since December 2008 as part of its campaign to stimulate economic growth, which has included the accumulation of more than $4 trillion in Treasury bonds and mortgage-backed securities.
That campaign is drawing to a close. The Fed said after the March policy meeting that economic conditions were strong enough that it would consider raising rates as early as the committee’s June meeting.
Jon Hilsenrath and Ben Leubsdorf wrote for The Wall Street Journal that the decision on when to raise rates wouldn’t be an easy one:
The divisions could present a challenge for Fed Chairwoman Janet Yellen in the months ahead. She led officials to a unanimous vote in March to drop language in the Fed’s policy statement assuring the central bank would be “patient” before raising rates. The change effectively opened the door to rate increases by midyear. But tough decisions now loom about whether to move then.
Since the March gathering, disappointing data have suggested the economy slowed in early 2015. Just Friday, the U.S. Labor Department reported hiring down-shifted sharply in March and was less than previously estimated in January and February. This could push more officials into the camp of those who want to wait.
“Data has surprised to the downside,” William Dudley, president of the Federal Reserve Bank of New York, said in an interview with Reuters on Wednesday. “It’s reasonable to think the bar is higher” to the central bank acting in June, he said. Mr. Dudley is part of Ms. Yellen’s inner circle of decision makers.
Jeff Cox wrote for CNBC that even taking a word out of the Fed’s language has been difficult:
While the record showed all but one member agreed with losing “patient,” there was less of an accord about how to proceed down the real path of tightening monetary policy.
Members thought it “appropriate” to remove “patient” due to “considerable progress” being made toward achieving the Fed’s twin goals of maximum employment and price stability.
They agreed that “an increase in the target range for the federal funds rate remained unlikely at the April FOMC meeting but that language in the Fed’s guidance provided the FOMC with ” the flexibility to begin raising the target range for the federal funds rate in June or at a subsequent meeting.” Language immediately after, though, pointed out that some members believe a rate increase might not be warranted until 2016.
Jonathan Spicer and Daniel Bases wrote for Reuters that many thought June could be the right time for a rate hike:
“I could imagine circumstances where a June rate hike could still be in play,” Dudley, a permanent voting member on the Fed’s policy committee and a close ally of Fed Chair Janet Yellen, told a Reuters Newsmaker event in New York.
“If the economy’s strong, the unemployment rate is dropping, wages are rising, and the outlook is good, you could conceivably get to that point,” he said, adding “the bar is probably a little bit higher” for a June hike given recent data.
Minutes of the Fed’s March 17-18 policy meeting, released on Wednesday, also show central bank officials are eager to get the rate hike process started but are likely to go slow once “lift-off” begins.
Several participants at the meeting said they were virtually certain June would be the right time for what would be the first rate hike since 2006, according to the minutes.
But Christopher Condon and Steve Matthews wrote for Bloomberg that raising rates too soon could cause more problems:
A premature increase could force policy makers to reverse course and cut the benchmark rate back to zero, damaging the central bank’s credibility, he said.
The minutes shed some light on what would make officials “reasonably confident” that inflation will move back up toward their 2 percent goal, one of the conditions for a rate increase.
“Further improvement in the labor market, a stabilization of energy prices and a leveling out of the foreign-exchange value of the dollar were all seen as helpful in establishing confidence that inflation would turn up,” the minutes showed.
Prices as measured by the Fed’s preferred gauge rose just 0.3 percent in February from a year earlier, and inflation has languished below the central bank’s 2 percent goal for 34 straight months.
The dollar’s strength featured prominently in the committee’s discussion. The Bloomberg Dollar Spot Index has advanced about 18 percent in the past year, keeping down
Basically it seems that even the smartest monetary policy makes are a bit stumped about what to do. There are arguments to be made for raising rates or keeping them stable. It looks as if the Fed is in an unenviable place of having a lot of information but no clear insight into where the economy is going – and thus what would be the best policy. All the uncertainty is sure to have investors on edge.
