The Federal Open Market Committee (FOMC) refrained from raising the federal fund rate at the April meeting, even with further improvement observed in the housing sector. However, speculation persists about another rate hike by the Fed in June, which would be the first time the Fed has raised the federal funds target rate since the historic liftoff in December.
The FOMC minutes, released Wednesday, showed that the an interest rate increase was not ruled out for June if incoming data about the economy improved.
"Participants agreed that their ongoing assessments of the data and other incoming information, as well as the implications for the outlook, would determine the timing and pace of future adjustments to the stance of monetary policy," the minutes said. "Most participants judged that if 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 Committee’s 2 percent objective, then it likely would be appropriate for the Committee to increase the target range for the federal funds rate in June."
However, the minutes did reveal that there were a two participants that judged it "appropriate to increase the target range for the federal funds rate at this meeting, citing their assessments that downside risks associated with global economic and financial developments had diminished substantially since early this year, that labor market conditions were consistent with the Committee’s maximum-employment objective, and that inflation was likely to rise this year toward the Committee’s 2 percent objective."
The committee reiterated that labor market conditions have improved due to strong job gains, while economic growth has slowed. Household spending is a moderate pace although real income has increased and consumer sentiment remains elevated. The committee noted that the housing sector has improved since the beginning of the year. However, on the downside, the committee noted that inflation is still running below the 2 percent long-run objective.
National Association of Federal Credit Unions (NAFCU) Chief Economist Curt Long said, "The FOMC is remaining noncommittal about its intentions with respect to the upcoming meeting in June. The tenor of the minutes were generally positive, but concerns for the global economy remain. While it is still somewhat unlikely that the Fed will move in June, the odds have improved substantially over the past two weeks.”
When it comes to the normalization of monetary policy on the part of the Federal Reserve, it comes down to two possibilities: either slow normalization or no normalization, according to St. Louis Fed President James Bullard in Santa Barbara, California, this week.
Bullard discussed two possibilities for monetary policy normalization: the Federal Open Market Committee (FOMC)’s scenario (slow normalization) and the market-based scenario (little or no normalization).
“The FOMC has laid out, via the Summary of Economic Projections, a data-dependent ‘slow normalization,’ whereby the nominal policy rate would gradually rise over the next several years provided the economy evolves as expected,” he said. “Market-based forecasts of FOMC policy, in contrast, envision ‘almost no normalization,’ whereby the policy rate would be changed only a few times in the next several years.”
Bullard said the three factors that favor the FOMC’s scenario are relatively strong labor markets in the U.S., an inflation rate that is closer to the FOMC’s target of 2 percent, and waning headwinds in global economic markets. According to Bullard, U.S. labor markets are “relatively tight,” although job gains for April, announced the day after Bullard spoke in Santa Barbara, were somewhat disappointing (160,000) compared with February and March. Bullard pointed out that the Fed’s labor market conditions index is well above historical averages. With the inflation factor, Bullard said that large movements in oil prices have had a substantial impact on headline inflation, and these measures have been trending higher as of late. On the waning global economic headwinds, Bullard said international influences on the U.S. economy appear to be waning in the first half of 2016 and that recent readings indicate a decline in financial stress; also, the effects of a stronger U.S. dollar appear to be waning.
"Evidence from labor markets, inflation readings and global influences suggests the FOMC median projection may be more nearly correct,” he said. “Evidence from readings on GDP growth and market-based inflation expectations suggests the market view of the path of the policy rate may be more nearly correct.”
Click here to view the FOMC minutes.