Coverage: June rate hike looks unlikely

Minutes from the last Federal Reserve Board meeting indicate that a rate hike is unlikely to come in June, something that some had predicted earlier in the year. It looks like officials are pushing the decision of a hike off until at least later in the year.

The Reuters story by Michael Flaherty and Howard Schneider had these details about what the minutes said:

Federal Reserve officials believed it would be premature to hike interest rates in June even though most felt the U.S. economy was set to rebound from a dismal start to the year, according to minutes from their April policy meeting released on Wednesday.

The central bank debated whether a slew of disappointing data, including weak consumer spending, signaled a temporary slump or evidence of a longer-lasting slowdown, with most participants agreeing economic growth would climb to a healthier pace and the labor market would strengthen.

The U.S. economy grew an anemic 0.1 percent in the first quarter, according to the most recent government data.

The minutes from the April 28-29 policy-setting committee meeting also highlighted the quandary the Fed faces in trying to avoid the market volatility tied to a rate hike while sticking to its meeting-by-meeting guidance on when that move will come.

With an increased amount of uncertainty and signs of softness across the economy, the minutes showed Fed officials pushing the prospect of a rate hike later into the year.

Jeff Cox wrote for CNBC that officials were dismissive of the economy’s stagnant growth:

Federal Reserve officials at their April meeting mostly brushed aside the wobbly start the U.S. economy has had in 2015, attributing the lack of growth to “transitory” factors that will abate soon.

Meeting minutes show a Fed Open Market Committee with little concern about growth, even though they detailed a laundry list of weak spots that included industrial production, housing and investment. Gross domestic product grew just 0.2 percent in the first quarter—a number likely to be revised to a negative—while the Atlanta Fed is tracking second-quarter growth at just 0.7 percent.

Despite their mostly dismissive tone, FOMC officials nevertheless decided against increasing the committee’s benchmark interest rate, a nonmove telegraphed at the March meeting. They even removed language providing any indication of when a liftoff might occur.

As for the key issue of interest rate timing, the minutes indicated “a few” members thought economic and financial conditions would be sufficient for a June liftoff.

The Wall Street Journal story by Jon Hilsenrath said that officials could even push raising rates past September:

Market participants are increasingly looking toward September—or beyond—for a Fed rate increase.

Roberto Perli, central bank analyst at investment advisory Cornerstone Macro, said the risks of a Fed move even later than September have increased since the April meeting because of the disappointing economic data.

“Three more weeks of little growth may have made at least some [Fed officials] more cautious,” he said.

Indeed, since the April meeting, Fed officials have seen a mixed bag of economic data. The Commerce Department reported last month that the economy grew at a meager 0.2% annual rate in the first quarter and many analysts expect that estimate to be revised down.

Though job growth picked up in April and the unemployment rate declined to 5.4%, several indicators of economic output—including industrial production and retail sales—have been disappointing.

In the process, many private forecasters have revised down their estimates for second quarter growth.

Paul Davidson’s story in USA Today had this background about how the Fed has been looking at the economic data:

Since the April meeting, reports on trade and retail sales have been surprisingly weak, and economists now estimate the economy shrank in the first quarter, further reducing the prospects for a June rate increase. And while many economists believe the Fed will pull the trigger in September, others say the odds of an even later move are growing.

Even in late April, many Fed officials were concerned about an economy that was shaping up to be weaker than anticipated this year because of a strong dollar that’s hammering U.S. exports and low oil prices that are crimping energy company spending.

“A number” of Fed officials “suggested that the damping effects of the earlier appreciation of the dollar on net exports or of the earlier decline in oil prices on firms investment spending might be larger and longer lasting than previously anticipated,” the minutes said.

Policymakers also expressed concern that “the expected boost to household spending from lower energy prices had apparently so far not materialized.” Low gasoline prices had been expected to boost consumer spending but recent retail sales reports have been disappointing, showing many consumers are banking their fuel savings.

Some officials voiced “particular concern about this prospect,” because their forecasts for moderate growth in the economy “rested largely on a scenario in which consumer spending grows robustly” despite other soft spots in the economy.

The New York Times story by Binyamin Appelbaum said that the Fed remained optimist despite the broader markets sentiment:

Such pessimism has been validated repeatedly in recent years. Indeed, Fed officials at the beginning of this year expected to raise rates in June.

But there was little sign such doubts were gaining traction in the internal debate about the timing of a rise in short-term rates, which the Fed has held near zero since December 2008 in a bid to stimulate economic activity.

The account of the meeting acknowledged that inflation remained sluggish, undercutting the need for higher rates to slow price increases, and there was general agreement that the improvement of labor market conditions slowed in recent months.

The Fed’s outlook, however, remains optimistic. “Most participants expected that, following the slowdown during the first quarter, real economic activity would resume expansion at a moderate pace, and that labor market conditions would improve further,” the minutes said.

There is so much speculation about when rates will be raised and little economic data to indicate when that might happen. The Fed seems to be struggling on when to pull the trigger and if it should even happen this year at all. It’s a tough balance to project that rates should increase but keeping investors in the dark about when it might happen.