Rate increase ‘coming’ despite Fed’s cautious tone

Federal Reserve officials said at a meeting early this month that they wanted to see evidence of stronger economic growth before continuing to increase the Fed’s benchmark interest rate, according to minutes of the meeting published on Wednesday.

But the account presented in the minutes did not shake a widespread conviction that the Fed will raise rates at its next meeting, which is scheduled for mid-June.

Analysts said recent economic data was strong enough to reassure the Fed, and investors increased their bets on a June rate increase.

Gus Faucher, chief economist at PNC, noted that shortly after the May meeting, the government estimated that the economy had added 211,000 jobs in April and that the jobless rate had fallen to 4.4%.

“That’s the kind of stuff they were looking for, that they were expecting, and they just wanted to see come to fruition,” he said, “and I think it did, and so now they can go ahead” with a rate increase at the June meeting.

Investors also learned for the first time on Wednesday how the central bank is likely to reduce its holdings of more than $4 trillion in Treasury and mortgagebacked securities.

A reduction of those holdings would be the last step in the Fed’s retreat from its economic stimulus campaign. The account of the May meeting reiterated that the Fed would probably begin taking that step later this year.

The Fed raised its benchmark rate in March to a range between 0.75 and 1%, the third increase since the 2008 financial crisis. Rates remain at a low level that supports economic growth by encouraging borrowing and risk-taking.

The Fed is gradually reducing those incentives by raising rates because it believes the economy is expanding at roughly the maximum sustainable pace.

Although the Fed left the rate unchanged this month, its statement after the meeting was widely interpreted as setting the stage for a rate increase because of its reference to slow growth in the first quarter as “likely to be transitory.”

The account of the May meeting, published by the Fed after a standard threeweek delay, generally reflects that optimism, describing most officials as ready to raise rates “soon,” provided the economy shows signs of the expected rebound.

But the minutes also offered an unexpected note of caution.

“Members generally judged that it would be prudent to await additional evidence indicating that the recent slowdown in the pace of economic activity had been transitory before taking another step in removing accommodation,” the account said, referring to the members of the Federal Open Market Committee, which determines monetary policy.

The account noted that job growth remained strong, and it described anecdotal evidence of a tightening labour market, including companies’ raising wages and investing in training programmes.

It also noted that the global economy, a drag on domestic growth in recent years, was showing signs of renewed strength.

The continuing decline in the unemployment rate is likely to weigh in favour of raising rates more quickly.

The May minutes also noted that financial conditions had loosened since the last rate increase. Borrowing costs have declined since March, and the dollar has weakened, the opposite of what the Fed had intended.

The account of the meeting also noted that the government had regularly reported slow winter growth in recent years, and there was some evidence to suggest that the problem was not the economy but the methodology.

But inflation has risen more slowly than the Fed had hoped it would at the beginning of the year, remaining below the 2% annual pace that policymakers regard as healthy.

The share of Americans who are working also remains significantly lower than before the recession. Some Fed officials see the combination as evidence that the economy is still benefiting from low interest rates.

Before the release of the minutes, the chances of a June rate increase stood at 78.5%, according to CME Group; by the end of Wednesday, the chances were 83.1%.