Fed was divided in June over hiking interest rates soon

WASHINGTON, USA – Federal Reserve policymakers were divided over whether US economic conditions would be strong enough to weather an interest rate increase soon, the minutes of the June 14-15 meeting showed Wednesday, July 6.

Some members of the Federal Open Market Committee saw growing improvement in the labor market and signs inflation was moving higher, underpinning support for a hike in ultra-low rates.

But the FOMC held off, as others at the meeting saw the economy subject to significant downside risks. The policymakers left the benchmark federal funds rate unchanged at 0.25-0.50% after a modest raise in December from near zero, where it was pegged for 7 years.

Almost all participants at the policy meeting said that the shockingly weak May labor report – with only 38,000 jobs added – had increased the uncertainty of the US economic outlook, the minutes said.

They generally agreed that it was advisable to “avoid overreacting to one or two labor market reports” and were optimistic that job growth would pick up to a level that would underpin strengthening in the jobs market.

Most participants thought inflation would move closer to the FOMC’s longer-run target of 2.0%, pointing to a pick-up in wage growth and recent rises in oil prices.

But other participants were “less confident” about that inflation path. They saw important downside risks, including “persistent disinflationary pressures from very low inflation and weak economic growth abroad.”

Participants overall thought that it would be “prudent” to wait for the result of the looming June 23 vote in Britain on whether to remain in the European Union to be able to assess its impact on global financial markets and US economic prospects.

The outcome “could generate financial market turbulence that could adversely affect domestic economic performance,” they believed, a concern that proved correct after Britain’s vote to leave the EU sparked sharp moves in major currencies and markets.

Another potential risk cited by some participants was the outlook for China’s foreign exchange policy and “the relatively high levels of debt in China” and some other emerging-market economies, the minutes said.

Since the meeting and the Brexit vote, expectations for a rate rise this year have fallen sharply.

The Brexit vote now has placed an obstacle to plans to lift the federal funds rate, said Harm Bandholz of UniCredit Economics.

“But by the end of the year the dust may have settled enough for the Fed to raise its target rate at least once this year,” Bandholz said.

The FOMC’s next meeting is scheduled on July 26-27. – Rappler.com