April FOMC Minutes: Fed Left Open Potential for June Rate Rise

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The decision to leave the range for the Fed funds rate at 0.25% to 0.5% at the April Federal Open Market Committee (FOMC) meeting was deemed as appropriate and “consistent with setting policy in a data-dependent manner and as leaving open the possibility of an increase in the federal funds rate at the June FOMC meeting,” according to minutes of the April session released by the Fed. Link.

June FOMC adjustments: The possibility of adjusting policy at the June meeting was a discussion point, and “members generally judged it appropriate to leave their policy options open and maintain the flexibility to make this decision based on how the incoming data and developments shaped their outlook for the labor market and inflation as well as their evolving assessments of the balance of risks around that outlook.”

Also on the June rate move potential, “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 Committee’s 2% objective, then it likely would be appropriate for the Committee to increase the target range for the federal funds rate in June. Participants expressed a range of views about the likelihood that incoming information would make it appropriate to adjust the stance of policy at the time of the next meeting. Several participants were concerned that the incoming information might not provide sufficiently clear signals to determine by mid-June whether an increase in the target range for the federal funds rate would be warranted. Some participants expressed more confidence that incoming data would prove broadly consistent with economic conditions that would make an increase in the target range in June appropriate. Some participants were concerned that market participants may not have properly assessed the likelihood of an increase in the target range at the June meeting, and they emphasized the importance of communicating clearly over the intermeeting period how the Committee intends to respond to economic and financial developments.”

Communication key, but market view on rate rise a concern: “It was noted that communications could help the public understand how the Committee might respond to incoming data and developments over the upcoming intermeeting period,” the minutes said. “Some members expressed concern that the likelihood implied by market pricing that the Committee would increase the target range for the federal funds rate at the June meeting might be unduly low.”

How to determine future action: FOMC members maintained the view that they “would assess realized and expected economic conditions relative to its objectives of maximum employment and 2% inflation.” The range of information to be monitored, the minutes said, included “measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.”

Inflation still not meeting the Fed’s goal: Given the shortfall of inflation from 2%, the Committee agreed that it would “carefully monitor actual and expected progress toward its inflation goal. The Committee expected that economic conditions would evolve in a manner that would warrant only gradual increases in the federal funds rate, and that the federal funds rate was likely to remain, for some time, below levels that were expected to prevail in the longer run.”

Improving labor market, but slowdown in economic activity: As noted in the post-meeting statement, the minutes indicated “Growth in household spending had moderated, although households’ real income had risen at a solid rate and consumer sentiment remained high. Since the beginning of the year, the housing sector had improved further, but business fixed investment and net exports had been soft. A range of indicators, including strong job gains, pointed to additional strengthening of the labor market.”

Weak first quarter spending: While noting aggregate spending in the first quarter “had been weaker than expected, participants continued to anticipate that economic activity would expand at a moderate pace over the medium term and that labor market indicators would continue to strengthen.”

Inflation still lagging: Inflation was expected to remain low in the near term, the minutes said, “in part because of earlier declines in energy prices, but to rise to 2% over the medium term as the transitory effects of the declines in energy and import prices dissipated and the labor market strengthened further. Participants generally saw the risks stemming from global economic and financial developments as having diminished over the intermeeting period but as continuing to warrant close monitoring.”

Economic activity may not have declined as much as data suggested: FOMC members agreed that the soft spending in the first quarter was not likely to persist, with most pointing to " steady improvement in the labor market as an indicator that the underlying pace of economic activity had likely not deteriorated as much as was suggested by the recent data on spending and production. Notably, solid job gains and real income growth, along with a high level of household wealth and relatively upbeat consumer sentiment, were expected to support a pickup in consumer spending after its slowdown in the first quarter.”

GDP rise ahead for rest of 2016? The low reading on GDP for the first quarter “could partly reflect measurement problems and, if so, would likely be followed by stronger GDP growth in subsequent quarters. However, some participants were concerned that transitory factors may not fully explain the softness in consumer spending or the broad-based declines in business investment in recent months. They saw a risk that a more persistent slowdown in economic growth might be under way, which could hinder further improvement in labor market conditions.”

Receding risks from global developments: As the post-meeting statement indicated, the Fed saw risks from the global financial situation as being reduced. The shift by Fed members in their policy expectations “seemed to contribute to the improved tone in global financial markets.” The minutes signaled that “several” FOMC members now saw the risks as “roughly balanced.” However, the minutes noted that “many others” thought there were still risks to the downside “either because of concerns that the recent slowdown in domestic spending might persist or because of remaining concerns about the global economic and financial outlook. Some participants noted that global financial markets could be sensitive to the upcoming British referendum on membership in the European Union or to unanticipated developments associated with China’s management of its exchange rate.”

Businesses pulled back further in 1Q: “Business fixed investment declined in the fourth quarter of 2015 and appeared to have dropped further in early 2016,” the minutes said. “As noted by a number of participants, the weakness in capital spending in recent quarters was in part due to the ongoing contraction in drilling activity and weak demand from abroad for goods manufactured in the United States. More broadly, several participants commented that their business contacts had expressed considerable caution about the economic outlook or had indicated that their firms were focused on cost-cutting measures that included delaying major expenditures, despite relatively favorable financial conditions. However, some other participants were more positive about the outlook for business spending, pointing to the optimism reported in a number of business surveys or to rising business investment in both equipment and commercial structures in their Districts.”

Labor force participation uptick welcomed: “A number of participants indicated that the recent rise in the participation rate was a positive development, suggesting that a tighter labor market could potentially draw more individuals back into the workforce on a sustained basis without adding to inflationary pressures and thus increase the productive capacity of the economy. It was also noted that businesses might satisfy increases in labor demand in part by converting involuntary part-time jobs to full-time positions.”

Inflation as measured by personal consumption expenditures (PCE): The 12-month change in core PCE prices also continued to run below 2%, the minutes indicated, “but it moved up to 1.7% in January and February from 1.4% at the end of 2015. Despite the recent rise in core inflation, some participants continued to see progress toward the Committee’s 2% inflation objective as likely to be gradual. They noted that, as they had expected, the March CPI data showed that the high monthly readings on some components of core prices in January and February were transitory, and that the March CPI data suggested that the 12-month change in core PCE prices likely moved down in March.”

Dollar depreciation: “The recent depreciation of the dollar and indications of a rebound of economic growth in China appeared to reduce pressures on the renminbi,” the minutes said. “More broadly, signs of a pickup in growth in economic activity in some AFEs and emerging Asian economies other than China also appeared to contribute to the improvement in sentiment in financial markets. Participants generally agreed that the easing in financial conditions in the United States would provide some support for consumer spending and business investment going forward and had reduced the downside risks to the outlook. Moreover, a number of participants cited reports from business contacts in their Districts of favorable credit conditions for household and business borrowers.”

Costs and risk to policy: “Some participants saw limited costs to maintaining a patient posture at this meeting but noted the risks--including potential risks to financial stability--of waiting too long to resume the process of removing policy accommodation, especially given the lags with which monetary policy affects the economy. A couple of participants were concerned that further postponement of action to raise the federal funds rate might confuse the public about the economic considerations that influence the Committee’s policy decisions and potentially erode the Committee’s credibility.”

A few backed a rate rise in April: While only one voted to increase the range for the Fed funds rate, the minutes said, “A few participants judged it appropriate to increase the target range for the federal funds rate at this meeting, citing their assessments that downside risks associated with global economic and financial developments had diminished substantially since early this year, that labor market conditions were consistent with the Committee’s maximum-employment objective, and that inflation was likely to rise this year toward the Committee’s 2% objective. Two participants noted that several standard policy benchmarks, such as a number of interest rate rules and some measures of the equilibrium real interest rate, continued to imply values for the federal funds rate well above the current target range. Such large and persistent deviations of the federal funds rate from these benchmarks, in their view, posed a risk that the removal of policy accommodation was proceeding too slowly and that the Committee might, in the future, find it necessary to raise the federal funds rate quickly to combat inflation pressures, potentially unduly disrupting economic or financial activity. Overly accommodative policy could also induce imprudent risk-taking in financial markets, posing additional risks to achieving the Committee’s goals in the future.”

KC Fed’s George dissents: “George dissented because she believed that a 25 basis point increase in the target range for the federal funds rate was appropriate at this meeting. Potential downside risks to the economic outlook had diminished since the March FOMC meeting, and the modal outlook was for economic growth, employment, and inflation outcomes consistent with the Committee’s statutory objectives. She believed that monetary policy should respond to these developments by gradually removing accommodation and noted that several frameworks for assessing the appropriate stance of monetary policy, such as prescriptions from various policy rules and some estimates of equilibrium interest rates, also suggested that a reduction in monetary policy accommodation would be appropriate.”

Comments: There appears to perhaps have been a little more push for an increase in the Fed funds range in the April session and clearly even more were of the view that a June rate rise could well be in the cards. Recent comments from Fed officials this week have certainly signaled that was the case. Now the debate becomes how much the data is tracking with Fed expectations and whether there is an even higher chance for the Fed to increase the range for the Fed funds rate in June. If not in June, then one would expect the groundwork would be laid for a rise in July. If that were the case, that would mark a major departure for this Fed and the Fed under the helm of Ben Bernanke following the economic downturn – a policy adjustment that did not come with a press conference. That could now tip the scales for a June rate rise as Chairwoman Janet Yellen would be able to use the session with reports to explain at great lengths why they moved forward in addition to what would be explained in the post-meeting statement. This again appears to be a Fed that is setting itself up to move in the opposite direction as most other central banks around the globe.

NOTE: This column is copyrighted material; therefore reproduction or retransmission is prohibited under U.S. copyright laws.