The Federal Reserve is inching closer to the first interest rate increase in nearly a decade, minutes of the central bankers’ latest meeting indicated on Wednesday.
The minutes of the Federal Open Market Committee’s (FOMC) 28-29 July meeting did not mention any timetable, but did state that most members believed that economic conditions were “approaching” those that would warrant a rate increase.
Most economists expect that rates, which have been held at near-zero since the 2008 financial crisis, will be raised at the Fed’s next policy meeting on 16-17 September. But the recent collapse in China’s stock markets and worries that the sell-off could spread may slow the Fed, according to some economists.
The minutes said: “Most judged that the conditions for policy firming had not yet been achieved, but they noted that conditions were approaching that point. Participants observed that the labor market had improved notably since early this year, but many saw scope for some further improvement.”
However, other FOMC members continued to be concerned that inflation remains too low. “Some participants expressed the view that the incoming information had not yet provided grounds for reasonable confidence that inflation would move back to 2% over the medium term and that the inflation outlook thus might not soon meet one of the conditions established by the [Fed] for initiating a firming of policy,” the minutes said.
At the last meeting, the committee left interest rates unchanged at near zero but once again signalled that rates will rise later this year.
Since the July meeting, some members have also expressed concerns that the slowdown in China’s growth could hold back the US economy.
A Bloomberg survey of economists earlier this month found that 77% expect the Fed to raise rates at the September meeting, but the markets appear less confident, with all of the main stock indices dropping slightly after the release of the minutes.
Liz Ann Sonders, chief investment strategist at Charles Schwab, said: “The minutes noted that conditions for a rate increase are ‘approaching’, although they did not specify timing.”
While the job market has continued to improve, most of the Fed’s members judged that there was room for more improvement and conditions for policy firming had not yet been achieved, she noted. But the Fed committee also noted that conditions were approaching that point.
Prior to the minutes’ release, the futures market had been assigning a 46% chance of a rate hike in September, which fell to 36% after the release. In a Bloomberg survey taken 7-12 August, 77% of economists said the Fed will act at the September meeting. “We still think September is in play, barring a weak jobs report between now and then,” Sonders said.
The minutes indicated that there was a robust debate between the doves and hawks, with the former pointing to the lack of inflation – supported by today’s release of the latest consumer price index (CPI), which showed only a marginal rise in the costs of food, gasoline and other staples over the month.
“We think the desire by the Fed to move off the zero bound is greater than their desire to adhere dogmatically to their 2% inflation threshold, as long as they perceive the conditions being in place to allow inflation to tick up from here. I also think the market would like to see the Band-Aid ripped off so attention can be less Fed-obsessed,” said Sonders.
This article was written by Rupert Neate in New York, for theguardian.com on Wednesday 19th August 2015 20.18 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010