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Conditions could soon warrant rate hike, Federal Reserve officials say

Federal Reserve officials believed last month that near-term risks to the U.S. economy had subsided and that an interest rate increase could soon be warranted. But they did not indicate when they would likely raise rates.
Federal Reserve Chairman Janet Yellen testifies on Capitol Hill in Washington, Tuesday, June 21, 2016, before the Senate Banking Committee. Yellen said the U.S. economy faces a number of uncertainties that require the Fed to proceed cautiously in raising interest rates. (Evan Vucci/Associated Press)

Federal Reserve officials believed last month that near-term risks to the U.S. economy had subsided and that an interest rate increase could soon be warranted. But they did not indicate when they would likely raise rates.

The minutes of their July 26-27 meeting show that officials were encouraged by a rebound in job growth. They also took note of a stabilization of financial markets after a bout of turbulence triggered by Britain's June 23 vote to leave the European Union.

The Fed officials believed those developments had lessened the risks for the economy in the short run. The minutes show that as a result, the officials thought a rate increase "was or would soon be warranted."

But a key factor holding the Fed officials back was the stubbornly slow rate of inflation, which has been running below the central bank's two per cent target for more than four years, according to the minutes.

The minutes released Wednesday closely parallel the message the Fed sent in a statement it released after its July meeting.

Rate hike 'possible'

In that statement, the Fed noted that the job market had rebounded from a brief slump. Still, it said it planned to monitor global economic threats and financial developments to ensure that they don't slow the economy.

This week, William Dudley, president of the Federal Reserve Bank of New York and a close ally of Fed Chair Janet Yellen, said in a television interview that a September rate hike is "possible." Dudley said he thought that solid job growth would continue and that the sluggish pace of the U.S. economy would pick up.

But, as the Fed itself as done repeatedly, Dudley stressed that any policy action would depend on the health of the most recent economic data.

Though some economists say they think the Fed will be ready to raise rates next month, most have said they think the policymakers will take no action before December.

The Fed's July decision to leave rates alone was backed by a 9-1 vote. Esther George, president of the Kansas City Fed, dissented in favour of an immediate rate increase.

In December last year, the Fed raised its benchmark lending rate from a record low near zero, where it had stood since the depths of the 2008 financial crisis. But in recent months, turbulence in financial markets and concerns about China and weakening global growth have persuaded the Fed to keep rates on hold.

Looking ahead to Yellen speech

Fed officials have also expressed concern about the tepid pace of U.S. growth, weakness in worker productivity, excessively low inflation and the long-term consequences of Britain's vote in June to leave the European Union.

Investors will be paying close attention to a speech that Yellen will give on Aug. 26 to an annual conference of central bankers in Jackson Hole, Wyoming, for any further clues about the Fed's timetable for a rate hike.

The minutes said "a couple" of officials had advocated a rate increase at the July meeting. However, the majority of the group agreed that waiting would give them more time to assess whether the economy was strong enough to withstand the potential aftershocks when the Fed does raise rates.

But Fed officials also noted the risks of waiting too long. If labour market conditions tightened so much that inflation pressures jumped, the Fed would have to respond with a more rapid series of rate hikes that could jeopardize the recovery.