Fed Officials Push For Rate Hike Relatively Soon

Dated: 10/12/2016

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WASHINGTON — Federal Reserve officials generally agreed the case for raising interest rates “had strengthened" in recent months as the labor market remains robust, with some calling for a hike "relatively soon," according to the minutes of the Fed’s Sept. 20-21 meeting released Wednesday.

"Some participants believed that it would be appropriate to raise the target range for the federal funds rate relatively soon if the labor market continued to improve and economic activity strengthened," the minutes said.

A growing contingent of Fed officials pushed for a rate hike at the September meeting, leaving the Federal Open Market Committee unusually divided and the market betting a hike is coming in December.

Some officials believed delaying a rate hike could overheat the labor market as “the economy was at or near full employment and inflation was moving toward 2%,” the Fed's annual target, the minutes read.

"Our base case remains for a December rate increase, but the FOMC minutes reveal widespread discord within the committee on a variety of issues," wrote Michael Gapen, chief U.S. economist at Barclays, in a note Wednesday. "These divisions, plus the tendency of the incoming data to be positive, but with blemishes, means a rate hike in December is not a done deal by any means."

In keeping the rates unchanged in September, Fed Chair Janet Yellen said Fed officials can afford to wait before a rate hike as many discouraged workers return to an improving labor market.

Three policymakers dissented from the decision, including Boston Fed President Eric Rosengren, who previously was known as a “dove” who tended to favor keeping rates low to stimulate growth.

The Fed has held its benchmark interest rate steady at 0.4% since raising it by a quarter percentage point in December, its first hike in nine years. Any decision on hiking rates would be gradual. Fed officials believe “economic conditions would evolve in a manner that would warrant only gradual increase in the federal funds rate,” the minutes said.

Fed policymakers have cited economic headwinds such as China’s slowdown and market turmoil early in the year, as well as a spring slump in job growth and the United Kingdom’s Brexit vote more recently.

But all of those risks largely have eased, with monthly job growth averaging a booming 261,000 in June and July before slowing somewhat recently. "Although the unemployment rate was little changed in recent months, job gains had been solid, on average," the minutes said.

With more jobs and rising income, household spending had been growing "strongly" and consumer confidence remains "buoyant," helping to compensate for soft business investment, the minutes said.

The U.S. economy has turned in meager growth of about 1% at an annual rate the past three quarters. And inflation remains stubbornly below the 2% target, though a core measure that excludes volatile food and energy items edged closer in August, reaching 1.7%.

In early September, Rosengren said he worried if the Fed doesn’t move now to bump up rates gradually, it eventually might have to lift them abruptly to combat inflation down the road, a move that could “shorten, rather than lengthen” the recovery. He also voiced concerns that low rates may be spurring dangerous asset bubbles in sectors such as commercial real estate as investors seek higher yields.

The increased labor force participation has kept the 5% unemployment rate from falling further this year, tempering wage and inflation pressures. That, Yellen suggested, provided the Fed a bit more leeway to stand pat on rates in the near term.

"Most of these participants thought it would be appropriate to await further evidence of continued progress" before a rate hike, the minutes read. "Several stated that the decision at this meeting was a close call."

Still, the Fed strongly signaled last month a rate hike was likely by the end of the year, assuming economic data continued to perform as expected. Fourteen of 17 policymakers forecast at least one rate increase in 2016. And the Fed’s statement described the risks to its outlook as “roughly balanced,” its most upbeat assessment since last year.

"A substantial majority now viewed the near-term risks to the economic outlook as roughly balanced, with several of them indicating the risks from Brexit had receded," the minutes said. 
The Fed also lowered its projected path of rate increases longer term, pointing to lingering obstacles to a more vibrant economy, such as weak productivity growth. Officials predicted the fed funds rate will be 1.1% at the end of 2017 and 1.9% at the end of 2018, down from their prior estimates of 1.6% and 2.4%, respectively.

Article Courtesy of USA Today, Roger Yu & Paul Davidson October 12, 2016

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