A majority of Federal Reserve officials are prepared to raise the central bank’s benchmark interest rate in June as long as the recovery remains on track, documents released Wednesday show. Such a move would underscore the resilience of the nation’s economy amid a shaky global environment.
The Fed had slashed its target rate to zero during the darkest days of the 2008 financial crisis, part of its aggressive and controversial efforts to revive the economy and avert another Great Depression. The central bank finally began withdrawing that support seven years later, when it raised interest rates in December.
But turmoil in financial markets early this year put the Fed’s plans for additional hikes on hold. Renewed fears about China’s economy forced analysts to lower their forecasts for global growth – and even sparked talk of a new recession. Oil prices continued to slide, and the strong dollar weighed on U.S. exports and tamped down inflation. Investors increasingly bet that the Fed would not raise rates again until the end of the year, if at all.
By the time Fed officials gathered in Washington in April, however, many of the concerns about the global economy had abated. The minutes of that meeting, released Wednesday, showed officials generally agreed that “the risks to the economic outlook posed by global economic and financial developments had receded.”
In an official statement released after that meeting, the Fed said only that it would “closely monitor” the world economy. The statement also made no direct mention of when the central bank might raise rates again. But during their meeting, officials explicitly discussed moving in June.
“Most participants judge that if the 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 [Fed’s] 2 percent objective, then it likely would be appropriate for the [Fed] to increase the target range for the federal funds rate in June,” the minutes show.
Some officials remained hesitant, however, questioning whether the data would be conclusive enough to make a decision. Some also worried that investors were not adequately prepared for a move. On Tuesday, financial markets were betting that the odds of a Fed rate hike in June were below 20 percent.
But at the April meeting, two officials argued that waiting too long to raise rates again could force the Fed to move more aggressively in the future – and damage the recovery in the process. Several officials also worried that delays could “confuse the public” and “potentially erode the [Fed’s] credibility.”
Since then, officials appear to have been trying to prep the market for the possibility of a move in June. On Tuesday, three Fed presidents – John Williams of San Francisco, Dennis Lockhart of Atlanta and Robert Kaplan of Dallas – said they expect to raise rates several more times this year, perhaps sooner rather than later. In addition, government data on inflation released Tuesday showed April’s increase in prices was the biggest jump in three years, bolstering the case for higher rates.
On Wednesday, Wall Street had enjoyed modest gains in morning trading. But the Standard & Poor’s 500-stock index and the blue-chip Dow Jones industrial average turned negative just after the minutes of the Fed’s meeting were released. The tech-heavy Nasdaq also gave up some ground. Markets were relatively flat at closing.
The Fed has not committed to an increase next month. It has repeatedly emphasized that its decisions will depend on the evolution of the economy. If the recovery is slower than expected, the Fed can delay any increases. If it is stronger than expected, the Fed could speed up.
Officials “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,” the minutes show. The current range for the Fed’s target rate is 0.25 to 0.5 percent. The Fed would probably increase that range by a quarter percentage point.
(c) 2016, The Washington Post · Ylan Q. Mui