Doubts about the strength of the US recovery appeared to grow among Federal Reserve policy makers in their latest rate-setting meeting as soggy economic data further diminished the prospect of a rate rise in the summer.
Minutes from the meeting on April 28-29 reveal a Federal Open Market Committee that was divided over when the central bank’s target range for the federal funds rate should be lifted from today’s near-zero levels. A “range of views” were expressed on the right time for a move.
Whereas a few rate-setters thought June could still be the right time for the first increase, they were outnumbered by those who thought conditions were unlikely to be right by then, following the release of weak economic data early in the year.
Bonds yields crept lower following release of the minutes. The yield on the ten-year Treasury note was down 3 basis points at 2.26 per cent.
The dollar, which has rallied for much of the last year on the prospect of the Fed lifting rates, gave up some of its gains against the euro to trade at $1.11. The S&P 500 closed little changed at 2125.85.
The Fed this year dropped its pledge to be “ patient” before raising rates, shifting to a new footing where it can tighten policy as soon as it decides the economic outlook is strong enough to merit a rise.
Earlier in 2015 a move as soon as June seemed a possibility, but the disappointing economic data in the first three months of the year undercut those expectations, with official growth figures revealing an annualised expansion of just 0.2 per cent.
The key question now confronting the central bank is how much of that slowdown reflects anomalous factors such as a port strike and bad weather, and whether a sharp rebound is in the offing.
The minutes to the April policy meeting suggest there were mixed views about this on the FOMC. While a number of reasons were advanced for the slowdown to be temporary, some rate setters backed the concern that the weakness might persist: in particular, the impact of the high level of the dollar and the decline in oil-related investment could last longer than expected.
“Participants judged that recent domestic economic developments had increased uncertainty regarding the economic outlook,” the minutes said.
The FOMC drew attention to the high value of the dollar as a continuing restraint. The strength of the jobs market is central to the Fed’s judgment about the outlook, and many of the policy makers also told the meeting that they thought the pace of improvement in the labour market had slowed. Balancing that, however, were other more positive signs on labour market conditions, including an increase in job openings.
With energy prices no longer declining, most participants in the meeting thought inflation would move back towards the committee’s 2 per cent objective.
Discussing the prospects of higher interest rates, the minutes said: “Many participants . . . thought it unlikely that the data available in June would provide sufficient confirmation that the conditions for raising the target range for the federal funds rate had been satisfied, although they generally did not rule out this possibility.”
A few members went further, and questioned whether the committee was providing enough monetary accommodation at the present time, as they cautioned against tightening policy in the near term.
A handful of policy makers said there may even be an argument for a discussion over whether to boost the FOMC’s inflation objective — something that has been advocated by Eric Rosengren, the head of the Boston Fed.
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