Fed minutes: Door still open for a June rate hike

WASHINGTON, USA – A surprisingly bullish view from the Federal Reserve on the possibility of raising interest rates next month sent the dollar higher and stocks tumbling on Wednesday, May 18.

The minutes to the Fed's late-April meeting showed central bank policymakers unexpectedly open to a rate hike in June, despite the first quarter economic slowdown and the looming British vote on exiting the European Union.

Moreover, officials on the Federal Open Market Committee were worried that markets were not taking the June option seriously enough, according to the minutes.

Coming after two FOMC members said on Tuesday, May 17, that they expected two to three increases this year, as early as the June 15-16 meeting, the contents the minutes sharply raised expectations that that could happen.

"With today's FOMC minutes, even the biggest skeptic won't be able to dismiss the chance for a June hike any longer out of hand," said economist Harm Bandholz at UniCredit.

Market reaction to the release was sharp: share and oil prices sank while the dollar surged and Treasury bond yields jumped.

The Dow Jones Industrial Average, up 0.5% before the minutes release, ended off 0.02%, and the dollar surged 0.8% to $1.1221 against the euro.

Market expectations of a June rate increase, based on CME rate derivatives, jumped from less than 5% percent last week to about 34%, and with a majority expecting an increase by July.

Global economy worries ebb

The Fed has repeatedly stated its intention to continue raising rates this year after December's first hike in 9 years. That prospect has already tightened money conditions for borrowers around the world and strengthened the dollar.

But with the economy slumping during the late winter and with leading central banks in Europe and Asia cutting rates to prop up sagging growth, the FOMC has remained outwardly cautious. It opted at the end-April meeting to keep its benchmark federal funds rate unchanged at an ultra-low 0.25-0.5%.

Some officials were still concerned over possible turmoil in global markets from China's handling of its exchange rate and from the Brexit referendum in Britain, which takes place a week after the June policy review.

But the minutes showed the panel was more confident in the economy and the possibility of moving in June, if economic data continues to improve, than investors had understood from the policy statement.

And FOMC members were worried that the market was not getting that message.

"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," the minutes said.

"They emphasized the importance of communicating clearly over the intermeeting period how the Committee intends to respond to economic and financial developments."

FOMC members stress the need for economic data to confirm the economy is growing firmly, and with 4 weeks before the next meeting, views could change.

Recent numbers on inflation, output, and consumption have been strong, but others on the employment market have weakened, leaving some questions in the air, economists note.

Chris Low, chief economist at FTN Financial, said nevertheless that the markets have been "too complacent" about the Fed, given its stated intention to increase rates.

But he expects the FOMC to hold off still in June.

"We continue to expect the Fed will not raise rates in June. But the minutes indicate there will be a lively discussion and the decision will be a close call, as apparently it was in April."

"Should the Fed pass on raising rates in June, there's always July," quipped Sam Stovall of S&P Global Market Intelligence. – Paul Handley, AFP / Rappler.com