Coverage: Fed now backing away from future rate hikes

The Federal Reserve Board minutes released Wednesday showed that policymakers are backing away from future rate hikes due to concerns about job growth and the Great Britain vote to leave the European Union.

Jim Puzzanghera of the Los Angeles Times has the news:

Because of the “considerable uncertainty” surrounding the then-pending “Brexit” referendum, Fed officials unanimously decided on June 15 to hold their benchmark interest rate steady at between 0.25% and 0.5%.

They said they wanted to see more data to determine if May’s paltry job growth of 38,000 was an anomaly or a sign of a labor market slowdown.

“In addition, participants generally thought that it would be prudent to wait for the outcome of the upcoming referendum in the United Kingdom… in order to assess the consequences of the vote for global financial market conditions and the U.S. economic outlook,” according to minutes of the meeting.

Some of their fears about the June 23 referendum, which was a key topic of discussion at the meeting, have been realized. Major stock indexes in the U.S. and abroad fell sharply in the wake of the British decision to split from the EU.

Steve Mufson of The Washington Post noted that the minutes showed a belief in strong economic growth in the United States:

They said that foreign economies “appeared to be subdued, that global inflation and interest rates remained very low by historical standards, and that recurring bouts of global financial market instability remained a risk.”

At the same time, the Fed said that the U.S. economy continued to show signs of greater strength. It said that some members of the rate-setting committee pointed to an increase in core inflation (excluding oil and food) and a “firming in wages.” The May employment figures were seen as a possible aberration. The notes said that most Fed governors thought that “in the absence of significant economic or financial shocks, raising the target range” for interest rates “would be appropriate” if domestic trends continued.

“The Fed will probably keep rates lower for longer than otherwise would have been the case,” Steve H. Hanke, professor of applied economics at The Johns Hopkins University, said regarding the impact of the Brexit vote.

Chris Rupkey, chief financial economist at the Bank of Tokyo, said that a strong jobs report this Friday could alter market sentiment and encourage the Fed to raise rates in September. “Stay tuned,” Rupkey said. “This Friday’s jobs report is going to be a big one. A rebound in jobs could really put a Fed rate hike back on the table this year in a hurry.”

Stephen Pounds of Bankrate.com noted that some Fed members wanted to raise rates anyway:

That doesn’t mean there weren’t participants who were ready for a rate hike from the 0.25% to 0.5% range that is now in place.

“Some of them emphasized that, with labor market conditions and inflation at or close to the committee’s objectives, taking another step in removing monetary accommodation should not be delayed too long,” the Fed minutes say.

Greg McBride, CFA and chief financial analyst for Bankrate.com, says the Fed is reluctant to raise rates, though there’s a collective feeling among committee members that the economy is edging closer to full employment.

“They are essentially waiting for a set of perfect conditions, which we are not seeing now, giving them further latitude to hold rates steady,” McBride says.