WASHINGTON, D.C.: Federal Reserve policy makers viewed an interest rate increase in June as unlikely and worried about the outlook for the economy, minutes from their April meeting showed on Wednesday (Thursday in Manila).
“Many participants” at the meeting “thought it unlikely that the data available in June would provide sufficient confirmation that the conditions for raising the target range for the federal funds rate had been satisfied, although they generally did not rule out this possibility,” the minutes of the meeting said.
A “few” officials of the Federal Open Market Committee thought that data collected by its June 16 to 17 meeting would likely show that the outlook had improved sufficiently to meet the central bank’s thresholds for raising the near-zero federal funds rate.
But generally, the April minutes reflected a “wait-and-see” attitude after a stall in US economic growth in the first quarter.
The minutes showed policy makers viewed the slowdown as due in part to “transitory” factors, such as severe winter weather, the stronger dollar and the West Coast port strike that ended in late February.
“Most participants expected that, following the slowdown in the first quarter, real economic activity would resume expansion at a moderate pace, and that labor market conditions would improve further,” the minutes said. Weak inflation would eventually rise toward the 2.0-percent target.
But there was a worry that “some of the recent weakness in the pace of economic activity might persist.”
The stronger dollar’s curb on net exports and cutbacks in energy company investment spending because of lower oil prices could be larger and last longer than previously anticipated, a number of participants said.
Consumer spending, which accounts for about two-thirds of US economic activity, and private investment spending were “unexpectedly weak,” despite a fall in gasoline prices that left more cash in consumers’ pockets.
“The expected boost to household spending from lower energy prices had apparently so far not materialized, highlighting the possibility of less underlying momentum in consumer expenditures than participants had previously judged,” the minutes said.
Weak consumer spending worries
Some participants expressed particular concern about that prospect because their forecasts for improving growth and job creation “rested largely on a scenario in which consumer spending grows robustly despite softness” in other areas of the economy.
Since the April FOMC meeting, a batch of tepid US economic data has further clouded the outlook for the Fed increase in its benchmark rate, pegged at the zero bound since late 2008 to support recovery from the 2008-2009 Great Recession.
Weaker than expected data on manufacturing and retail sales has led economists to revise downward estimates for first-quarter growth, initially reported by the government at a paltry 0.2 percent annualized rate, into contraction territory, and for the second quarter.
A solid report Tuesday on home construction and building permits in April provided a bright spot, spurring hopes that the wobbly first quarter was a blip and not the start of a more prolonged slump.
Markets, enjoying the boon of easy money, have generally priced in a Fed rate hike in September, or even in December.
“The FOMC is not likely to tighten in June . . . We read the minutes as confirmation September is still very much in play,” said Chris Low at FTN Financial.
IHS Global Insight economists agreed: “We continue to expect a September rate hike, but could very well move that back to December, or even early 2016, if the expected improvement doesn’t materialize.”