Coverage: Fed’s minutes indicate potential June rate hike

Minutes from the April meeting of the Federal Open Market Committee were released on Wednesday, and they indicate that the Fed might raise interest rates during its June meeting if the economy continues to improve.

Kate Davidson and Jon Hilsenrath of The Wall Street Journal had the day’s news:

Until a few days ago, traders in futures markets saw almost no possibility the Fed would move short-term interest rates up at midyear. However, a batch of strong economic data, recent comments by Fed officials and a new release by the central bank on the deliberations at its last policy meeting have changed that perception.

Fed officials concluded a rate increase in June was a distinct possibility when they last gathered to discuss the economy, according to minutes of their April 26-27 policy meeting released Wednesday afternoon.

“Most participants judged that if incoming data were consistent with economic growth picking up in the second quarter, labor market conditions continuing to strengthen and inflation making progress toward the [Fed’s] 2% objective, then it likely would be appropriate for the [Fed] to increase the target range for the federal funds rate in June,” said the minutes.

After the release, traders in futures markets put a 34% probability on a move by the June 14-15 meeting, up from just 4% a few days ago. The Fed could still wait to move instead at its meetings in July or September. By late Wednesday, traders put a 56% probability on a move by July, up from 20% on Tuesday.

Binyamin Appelbaum of The New York Times noted that the rate hike possibility was unexpected by investors:

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 percent chance of a June increase at the beginning of the week; by the end of Wednesday, that had spiked above 30 percent.

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.

Matt Clinch of CNBC.com noted that Treasury yields gained after the minutes were released:

The yield (which has an inverse relationship to the price) on the benchmark 10-year Treasury note sat higher, at 1.8643 percent, after hitting its highest level in two weeks, while the yield on the 30-year Treasury bond was also higher, at 2.6715 percent.

The two-year yield continued its surge, hitting its highest level since March 16, and was last trading at 0.9040 percent.

Lower rates and a dovish Fed have helped Treasurys to rally in recent years and any reversal of that stance is likely to be detrimental to the price of fixed income assets. Yields ticked higher Wednesday as investors shunned the asset class.

In the minutes, the Fed said it will likely raise interest rates in June if economic data points to stronger second-quarter growth as well as firming inflation and employment.